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Globalisation, Vertical Relations and the J-Mode Firm
Daniel Coffey Philip R. TomlinsonEconomics Division School of ManagementLeeds University Business School University of BathUniversity of Leeds BathLeeds, LS2 9JT BA2 7AY.
Tel: +44 (0)113 233 4485 + 44 (0) 1225 383798
Fax: + 44 (0) 1225 386473
Email:[email protected] [email protected]
May 2002
Keywords: Globalisation, Vertical Relations, J-Mode firms, production co-ordination, hierarchy,strategic-decision making.
JEL Classification Codes (F21, F23)
Abstract
This paper is concerned with two overlapping issues. In the first instance, we consider theapparent tensions between the visible effects of globalisation upon the Japanese economy andthe claims of successive commentators that novel Japanese production systems of co-ordinationand vertical supply are particularly conducive both to national and regional industrial stability.Secondly, we set out a critical reassessment of the lessons that the literature has drawn to datefrom both the evident successes and current difficulties of Japan’s post-Second World Wareconomy; taking as the framework of reference contributions such as Aoki (1988, 1990, 1994)on the J-mode firm, Katzner (1999) on comparative economy and culture, and Porter et.al (2000)on Japan’s present economic crisis. This paper argues that (a) the basis for many of the claimsof historic novelty in forms of material organisation in Japanese industry is surprisingly weak,that (b) these claims have encouraged an unwarranted tendency towards neglect of the problemsposed for the national and regional economy by the globalising activities of Japan’s largetransnational corporations (TNCs), and that (c) analysis should dwell less on the supposednovelties at the point of interface between production unit and market or in the conduct ofvertical supply relations, and more on the lessons to be drawn from a careful study of the pastachievements of, and current political-economic impasse in, state strategic planning and the roleof industrial policy.
To be presented at the Seventh International POST-KEYNESIANCONFERENCE, June 29-July 3 2002, Kansas City, Missouri, USA.
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(1). Introduction
This paper is concerned with two overlapping issues. In the first instance, we consider the
apparent tensions between the visible effects of globalisation on the Japanese economy and the
claims of successive commentators who have repeatedly argued that economists should make a
careful study of comparative economic institutions in Japan and the ‘West’, on the grounds that
novel systems of co-ordination and vertical supply evolved in the former are particularly
conducive both to national and regional stability in production. Secondly, we set out a critical
reassessment of the lessons that the literature has drawn to date from both the evident successes
and current difficulties of Japan’s post-Second World War economy; taking as the framework of
reference contributions such as Aoki (1988, 1990a, 1994) on the J-mode firm, Katzner (1999)
on comparative economy and culture, and Porter et.al (2000) on Japan’s present economic crisis.
The thesis we advance is that (a) the basis for many of the claims of historic novelty in forms of
material organisation in Japanese industry is surprisingly weak, that (b) these claims have
encouraged an unwarranted tendency towards neglect of the problems posed for the national and
regional economy by the globalising activities of Japan’s large transnational corporations (TNCs),
and that (c) analysis should dwell less on the supposed novelties at the point of interface
between production unit and market or in the conduct of vertical supply relations, and more on
the lessons to be drawn from a careful study of the past achievements of, and current political-
economic impasse in, state strategic planning and the role of industrial policy. In doing so we
draw upon the critique of the information theory of the firm as developed by Aoki in Coffey
(2001), and upon the strategic decision-making approach to industrial organisation developed in
Cowling and Sugden (1994, 1998) and its application to the case of Japan by Cowling and
Tomlinson (2000, 2002) and also Tomlinson (2002).
The paper is organised as follows. Section (2) broaches the issue of ‘globalisation’ of supply
networks when the user-production process manufactures a complex mix of products. Section
(3) considers vertical relations and strategic re-orientation in Japanese manufacture. In both
sections we follow the existing literature and consider the specific case of the automotive sector
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(principally car manufacture). Section (4) then considers the implications of our analysis in the
broader context of the recent debate(s) concerning the present malaise afflicting Japan’s national
economy. Finally, Section (5) concludes.
(2). Comparative Industrial Systems and Globalisation
Interest in comparisons between Japanese and Western economic institutions is considerable. A
useful example is provided in Katzner (1999), who makes the general case that there are cultural
borders which vitiate any simple or direct application of economic models developed in one
national or regional context to the illumination of problems posed in another. In a critical
response to this contribution Thiruvadanthi (2000) takes the burden of Katzner’s thesis to hinge
upon the universal applicability of the methodology of constrained maximisation, which may be
taken to encompass situations of bounded rationality in the sense of Herbert Simon, and on the
question as to whether or not economic analysis is culture-specific to the point where cross-
cultural study is rendered ineffective by the tacit pre-conceptions of the ‘alien’ investigator. The
rebuttal offered consists both of an acceptance of the importance of ‘culture’ in determining both
the objective function and constraints of the (boundedly) rational maximising individual, and a
reaffirmation of the possibility of meaningful cross-cultural application of the maximising
assumption.
These differences notwithstanding, however, it is possible to discern a tacit agreement between
Katzner and Thiruvadanthi on the empirical fact of a divergence in the observed behaviour of
Japanese and Western institutions, inasmuch as the contributions of both authors dwell on the
appropriate methodology applicable to the study of each. The point of departure in this paper
is that while it is difficult not to support Thiruvadanthi’s position on the general applicability
of a maximising calculus when applied to the study of the behaviour of the Japanese firm, and
in particular Japan’s giant transnational corporations, the empirical grounds upon which much
of the recent comparative industrial organisation literature is based are not well-founded.
It is now a commonplace, for example, to see it asserted that manufacturing activity in the
developed industrial economies of the world has undergone a radical transformation from a state
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of ‘Fordist’ mass production, in which factory systems producing for the consumer goods
market were limited to volume replication of a more or less homogeneous good, to one of a
variety of ‘flexible’ departures in which a mix of differently specified products is manufactured
using the services of a single integrated production facility. In the exemplary case of car
manufacture and assembly – the industry typically cast as the leading industrial sector which
meters in its internal development the pace and direction of change in industry more generally [1]
- there is a strong presumption that Japanese firms like Toyota challenged the hegemony of the
West by introducing, for the first time, manufacturing systems which were flexible in this sense.
To a surprising degree a great deal of the comparative economic analysis carried out for Japan
vis-à-vis the advanced industrial West is founded on the assumption that this is a secure
empirical fact. This is very evident, for instance, in the work of Masahiko Aoki, who has sought
in a series of contributions to reformulate the theory of the firm on the basis of this empirical
assumption: in particular, the dichotomy he draws between a ‘Japanese’ mode – or J-mode – of
organisation, and what he perceives to be the competing Western alternative, is manifestly rooted
in the sort of distinction successive commentators have attempted to draw between flexible
‘Toyotism’ and ‘Fordism’. Hence Aoki belongs squarely to the ranks of those who have sensed
something remarkable in Toyota’s ability to offer a mix of car specifications "attuned" to
"diverse" tastes (Aoki, 1990:4), a choice of illustration, and a predisposition in historical
interpretation, which clearly resonates with a wider secondary literature[2], but which is
nonetheless empirically unsustainable.
To see this, consider the historic evolution of flexible mixed-assembly techniques in the Japanese
car manufacture and assembly sector. The received account is well known, and is rehearsed in
some detail in Asanuma (1994:122-129), and discussed at length in Shiomi (1995). Mixed-
assembly production methods, in which different specifications of a product are built up in a
varying sequence along the same assembly line, when applied to the manufacture of cars in Japan
1 The use of the car manufacture and assembly sector as a more general point of reference is a widely acceptedpoint acknowledged by others, including for instance Dicken (1998:316), following Womack et al (1990:11).2 Some good examples from this wider literature cited elsewhere in this paper are Ohno (1988), Ruigrock andVan Tulder (1995), Womack and Jones (1996), and Dicken (1998): a full survey would be very extensive.
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were first adopted on a significant scale by Toyota, in 1966. The date is important. At this point,
Toyota launched a ‘full’ line of cars with a range of alternative specifications to be built up on
a single integrated assembly line: "48 different combinations of engine, body, and transmission",
which expanded, "with the inclusion of different interiors, exteriors, and paint colours", to a total
of 332 finished versions (Shiomi, ibid: 38; also Asanuma, ibid). Shiomi has labelled this practice
of combining features differently to form a mix of choices ‘wide-selection’, and his tacit measure
of the degree of wide-selection is the total number of permissible attribute combinations that are
calculable for individual car-lines built up on the same production lines using mixed-assembly
methods. Both the general claim – that Japanese firms led the break from ‘Fordism’ – and the
specific assumption that they excel in product ‘customisation’, permeate Aoki’s analysis.
The problem here is that by Western standards of the time, the complexity of the range produced
in Toyota’s first major venture in mixed-assembly was not unduly impressive. In fact mixed-
assembly in the West has a long lineage, and in the case of car assembly was already at a stage
of considerable maturity by the 1950s, well before the first Japanese experiments. A survey of
some of the historical-anecdotal evidence for the car industry on this point, has noted, for
instance, a description by contemporary observers of the product(s) of a US car assembly plant
in the earlier part of the 1950s which processed three distinct "makes" of automobile, each with
"many models and styles", each painted with "one of forty-five distinct colours", and with over
one hundred and twenty-five separate "accessory specifications" yielding an "astronomical"
number of combinations of feature and attribute (Lyddon, 1996:83): according to these observers
the flexible build schedules were so contrived as to "permit each car in sequence to be preceded
or followed by a car of completely different type, instead of a ‘run’ of similar models" (see ibid).
The original passage cited here can be found in Walker et al (1956:7-8), and it is noteworthy that
the observers in question actually go on to note that the plant in question could run for "more
than a year" at its maximum rate without obliging the plant in question to produce two identical
cars. There is no hint here of a ‘Fordist’ system limited in its ability to vary the product-mix.
Moreover, this was also an industry in permanent evolution, and by 1966 – the generally agreed
point of Toyota’s major innovations in this area – Western assembly lines were not only building
ranges which easily matched in complexity anything built in Japan, but which also ran routinely
to a ‘width’ of selection counted in millions of potential feature permutations. In the sphere of
mixed-assembly as such, the Japanese car industry was a demonstrable laggard, not a leader[3].
What is noteworthy is that the roots of this error in comparative organisational history can be
located both in the claims of Japanese authors like Asanuma or Shiomi, and in the
presuppositions of Western economists. While a detailed study of how such a situation might
come to pass lies beyond the intended scope of this paper, there are some obvious starting
points. The appearance of Piore and Sabel (1984), for example, helped promote an enormously
successful caricature of the twentieth century development of the consumer goods industries of
the West that emphasized the dedicated pursuit of plant-level economies of scale for a single-
product specification to the exclusion of manufacturing strategies based on variety and plant-level
economies of scope. This is the basis of the ‘Fordist’ model that has served as a useful foil for
Aoki’s J-mode; but the resulting comparisons are invidious, since the former is an historical
misrepresentation [4]. In the context of the debate between Katzner and Thiruvadanthi, over the
necessity or otherwise for a confluence of an investigator’s cultural background with the
underlying construction of a model, it might be observed that here is an instance where two
3 Since this might seem like a controversial claim, it is worthwhile being explicit on what a rebuttal wouldentail. That writers prior to 1966 regarded flexible mixed-assembly systems as the Western industrial norm incar manufacture is hardly to be disputed given the wealth of contemporary commentary which is available (see,for example, Rae, 1965:200). Similarly, 1966 is carefully documented and generally agreed upon as the year inwhich Toyota first adopted a flexible mixed-assembly system, following some earlier experiments by itsconsignment assemblers (see Asanuma, 1994, Shiomi, 1995, ibid). This leaves only the question of the actualspecifications of the Toyota range; but these are also a matter of record, and can be readily compared withintegrated car-lines built elsewhere around the world at this time, and here it must be said that there is norealistic prospect of a demonstration that the Toyotan car-lines was in some sense ‘unique’ in its complexity: itwas not.4 Piore and Sabel’s caricature of the evolution of the West’s mass production industries in fact represents adistinct narrowing of perspective over previous usages and assumptions concerning the basis of Westernmanufacture. Peter Drucker, for example, writing in the mid-1950s, would argue that it was the "essence ofgenuine mass production" that it could create "a greater diversity of products than any method ever devised byman" owing to the possibilities for combining individual component parts differently to form a "large variety"of finished items (Drucker, 1955:171; cited in Lyddon, 1996:82). This emphasis on the role of diversity inmass production was also a standard feature of textbooks on the Western car industry before the appearance ofPiore and Sabel – a typical and respectable study of the economics of the sector would note, for instance, thatthe industry in question was based on a system of "mass production" that attempted to "cater to all tastes"without sacrificing overall volumes of factory output by varying both major and minor components and features(Rhys, 1972:52). In fact, the passages in Aoki’s contributions intended to convince the reader of the novelty ofToyota’s ability to mix its product specifications could just as easily be found in much earlier workadaydescriptions of Western plants.
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academic ‘cultures’ have ‘colluded’ in a comparative error.
This is an error, however, which has had a non-trivial effect on the conduct of disputation over
globalisation and the construction of complex transnational supply networks. It has been asserted
that ‘flexible’ manufacture, of the type Aoki attributes to the J-mode firm, acts as a mitigating
influence on the globalising propensities of giant corporations, the argument being that the sort
of complex supply logistics evolved in the age of ‘Fordism’ are less viable in the age of Toyota.
This argument is developed quite explicitly in a number of influential commentaries on the
economic geography of production (as for example, Dicken 1998:165-172), and has been linked
just as explicitly to Aoki’s depiction of the J-mode (see Lash and Urry, 1994). The stance taken
on this issue appears to stem directly from an ostensible critique of the logic of forecast driven
manufacture, in which it is maintained that global sourcing of inputs to production is viable only
when the overall quantity of units demanded is large relative to the number of varieties offered,
because otherwise accurate delivery schedules for the parts to be supplied to the assembly plant
cannot be drawn up in advance of demand [5]. The historically observed reality undermines the
viability of this premise: the global supply networks of Western TNCs in car manufacture and
assembly evolved precisely in the context of flexible assembly of a large variety of products.
(3). Vertical Control and Strategic Re-orientation
Let us consider the issue of globalisation further in the context of an appraisal of the vertical
5 This can be rationalised by an appeal to the law of large numbers. If the number of end-product specificationsfor a product exceeds total expected demand, then meaningful forecasts are impossible for the obvious reasonthat even perfect knowledge of the underlying probability distribution of orders will not provide an effectiveguide to the relative frequencies with which specific orders are actually made. The error in this formulaton isthat it confuses the range of final-assembly specifications with the number of varieties of individual component-parts : even if the number of end-product specifications is very ‘large’, for individual components the numberwill be ‘small’.
To this it is worth adding one additional point: so far as ‘width’ of selection is concerned the numberof end-product specifications offered on Japanese car lines has never in any event been large by Westernstandards, so that the weight given to ‘customisation’ by writers like Aoki is entirely misplaced. A little notedglobal survey carried out in the late 1980s, for example, found that car-lines in Japan were the most ‘restricted’in the number of permissable attribute combinations, while Europe’s quality car manufacturers were the mostexpansive, building ranges which offered customers a choice between ‘billions’ of specifications (Krafcik,1988). This is the picture which always emerges whenever anyone takes the time to actually check: it was truethen, and it is true today. If width of selection really were a decisive factor determining the viability of globalsourcing then the evidence would show that Japanese manufacturers were most attuned to the requirements of atransnational supply network.
relations which exist between Japanese car assemblers and their component part suppliers.
According to Aoki (1990:13), J-mode firms, like Toyota, embrace the so-called ‘duality’
principle whereby "flexibility" is attained in production through a non-hierarchical mode of
coordination that (1) exists externally between so-called keiretsu firms and their main contractors,
and (2) exists internally between workers and management. In each case the dual relation is
completed through a rank hierarchy of keiretsu suppliers and employees, basically entailing a
system of incentives designed to overcome problems of moral hazard and adverse selection. For
present purposes our concern is with the first set of relationships, and perceptions of the form
and function of the subcontracting arrangements that are a widespread feature of Japanese
manufacture [6].
In this respect, the general picture is that each of Japan’s large corporations (the kaisha) belongs
to a corporate group (kigyo shudan), typified as a horizontal conglomerate of financial and
industrial interests (Scher, 1997). Production is then organised through keiretsu networks, where
intermediate goods and services are supplied through an extensive use of vertical sub-contracting
arrangements. This has encouraged the description of the Japanese firm in terms that imply it
is a "vertically de-integrated" entity (Ruigrok and Van Tulder, 1995: 39, 51-54) – in contrast to
images of "Fordism", which tend to be constructed in a fashion that emphasizes coordination
through large vertically integrated firms (ibid: 39). The automobile industry is again the most
cited example of Japanese industrial organisation, an appropriate choice, since it has the largest
and widest number of keiretsu linkages within Japanese manufacturing: the extensive survey
reported in Dodwell (1997:6) found 11 final assemblers, approximately 1400 component
suppliers, and more than 10,000 materials producers and other subcontractors. However,
whether Japanese car manufacture and assembly is properly represented in terms which posit
a relatively de-integrated set of contractual relations is, to say the least, contentious. Once again
6 This is not to say that employer-employee relations are not important or that the account given by Aokicannot be challenged. In particular, Aoki assumes that differences in the management of employees in Japanesefirms compared to Western firms (by which in this context he invariably means North American) can beexplained in functional terms in the sense that these differences are a reflex of the contrast between flexibleproduction systems servicing a differentiated market and Fordist systems producing a homogeneous good: forreasons which should by now be obvious, explanations of this type – based on this ‘duality’ – lack a soundempirical footing.
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the influence of Piore and Sabel (1984) is strongly apparent, and partly, as a result of their
contribution, the literature today is characterised by casual assumptions of a simple functional
link between process ‘flexibility’ and de-integration from suppliers [7].
At the same time, and against this, the standard historical study of the evolution of the Japanese
car manufacture and assembly sector (Cusumano, 1985), which appeared at about the same time
as Piore and Sabel’s thesis, provides extensive data to show that – insofar as the international
automobile industry is concerned – measurement of the comparative degree of vertical integration
hinges critically on the ownership thresholds set by the analyst. Thus on a narrow definition of
"in-house" manufacture, and using the ratio of internal manufacturing and other operating costs
to net sales revenue (after deducting for operating profit), vertical integration at Toyota and
Nissan for the five year period just prior to publication – namely for the period 1979-1983 –
was, on average, 28% and 26% respectively, compared to 43% for GM (for 1979), 36% for Ford
(for 1979), and 32% for Chrysler (for the whole period), suggesting a national difference which
is variable by firm, and not as large as often insinuated, but clear nonetheless (see ibid:188-189).
However, when a measure of "group" integration was employed for the Japanese firms, based
on a 20% rather than a 50% minimum threshold for manufacturer’s equity in a ‘supplier’, the
degree of integration rose sharply, to 74% for Toyota and 73% for Nissan, constituting for the
author proof that "the Nissan and Toyota groups were far more integrated than Ford, Chrysler,
or General Motors, the most highly integrated American automakers". (ibid:190; emphasis
added).
Hence, while the statistics confirm the widespread use of subcontracting in the Japanese
automobile industry, the degree of vertical integration on one reasonable measure is much higher
than that generally perceived in the literature. This argument can be explored further with
reference to Table (1) which, using data from Dodwell (1997), provides some more recent details
7 This became apparent soon after publication of Piore and Sabel’s book, with the appearance of commentarieslike Banchi (1989) stating rather flatly that while the auto-sector in Japan was characterised by horizontalconcentration at the point of commercial competition, it was also "profoundly non-integrated" (ibid: 28) alongvertical lines. This author also dates the persistence of ‘Fordist’ mass production to the mid-1970s.
9
of the supply structure for Japan’s main automotive assemblers: Toyota, Nissan, and Honda.
The table is in a matrix format: matching the assemblers’ core keiretsu suppliers with some of the
main auto-components that they supply. In Column (1), the assembler’s equity holding in each
keiretsu supplier is provided in parenthesis. The table also distinguishes between what Dodwell
(1997) describes as core parts (such as body panels and engines), functional parts (brakes and
clutches), and other interior or exterior parts (air conditioning and seats). Although data on
monetary values are unavailable, two key points are readily apparent. The first is that each
assembler retains direct control over a significant proportion of the manufacture of its major
components [8]. The second is confirmation of the significance Cusumano attaches to parent
firm’s equity holdings in their major keiretsu partners: indeed most of the subcontracted firms
shown in the table are proper subsidiaries in the sense of meeting Cusumano’s 20% equity
threshold (in the majority of cases the assembler is in fact the supplier’s largest shareholder).
Moreover, while these firms represent a first ‘tier’ in the subcontracting process, we should also
note that both the assemblers and their major keiretsu partners hold significant equity stakes in
suppliers further down the chain [9].
What is therefore important is the degree of effective control the assembler has over the direct
management of its supply chain, a viewpoint consistent both with that espoused by an earlier
generation of Japanese commentators, who stressed the role of "quasi-integration" through the
group as a close substitute to full vertical ownership (Kono, 1984), and with the strategic
decision making approach to industrial organisation, in which the firm’s boundaries are
determined by its locus of effective decision making (see Cowling and Sugden, 1994, 1998).
6. Dodwell does not provide any further details on as to why certain parts are classified as either "core" or "functional", and while this might have a resonance in sections of the industry it should be noted here that our ownfield-based experiences indicate that terminology and frames of reference vary by plant and firm even within thesame national region. We have retained this breakdown, however, as a heuristic device with a plausiblecorrespondence with one aspect of production of direct interest to economists. In economics, we are obviouslyconcerned with the asset specific nature of parts and the extent to which the decision to fully integrate reflects thisdimension of the component (see, for instance, Williamson 1975, 1985). Although there is no empirical data uponwhich to draw such inferences directly from Table (1), it does not appear unreasonable to suppose that theproduction of the ‘core’ parts listed entails both significant sunk costs and (in the case of those componentscomprising the power train) commercially sensitive information on design and construction. The (Japanese)assemblers’ direct control over such parts would therefore appear to be strategically important.
9 Reciprocal equity holdings do exist, but the major shareholdings are typically concentrated among a few large
10
There is more to this, of course, than the mere holding of equity in keiretsu partners: for instance,
it has been observed that it has been a common practice for the large Japanese assemblers to use
such a control lever to appoint former executives into key positions within their supply chains.
This establishes direct lines of communication and facilitates the dissemination of corporate
strategy throughout the production and supply chain, re-enforced by long-term contracts which
foster, in the words of Ruigrok and Van Tulder (1995: 53), "a one-way dependency of suppliers
on the end-producers" [10]. Indeed, Japan’s automobile industry has been characterised as a web
of "high dependency relationships" where keiretsu firms are effectively "locked in" to their main
contractors [11].
Nevertheless, Japan’s keiretsu networks and the nature of its sub-contracting relationships have
received considerable attention in the literature. In this respect, successive authors have paid
particular attention to the various technology sharing arrangements, personnel exchanges and
mutual financial commitments that exist between keiretsu partners. The general consensus which
emerges is that Japan is unique in establishing and sustaining such long-standing inter and intra-
firm "close ties", "co-operation" and "mutual trust" (see, for instance, Smitka, 1991, Gerlach,
1992, Scher, 1997). Yet, the reality is that such transactional relationships are often governed
by the relative bargaining powers of each partner. In this respect, closer inspection reveals that
Japanese manufacturing has been co-ordinated along hierarchical lines, with Japan’s large
corporations using a variety of mechanisms to organise and directly control their keiretsu
partners in order to further their own strategic interests (see also Ruigrok and Van Tulder, ibid:
51-54). As such, perceived differences in the degree of effective vertical integration between
‘Western’ and ‘Japanese’ firms owes as much to the eye of the beholder as the contrast between
corporate shareholders, who exercise joint control (Sheard, 1994: 310).10 This view is re-enforced by Adio Kodani, a former Nissan executive appointed (in 1990) as President of theNissan affiliated supplier Ikeda Bussan. According to Kodani, the keiretsu relationship functions "to create acomfortable vertical supply structure for Nissan, rather than as a structure to make affiliates stronger" (NikkeiWeekly, 21/8/2000). A similar perspective, albeit more brutally expressed, is evinced in the comment that thekeiretsu supplier "perceives that Toyota’s policy is "not to kill, neither to keep alive easily" (Kono, 1984:127).
11 The extent of this "dependence" is somewhat reflected in Dodwell (1997: 11) who, citing estimates from the1993 Japanese Fair Trades Commission Survey, point out that more than three-quarters of Japanese auto-suppliers depend upon one final assembler for over 50% of their orders.
11
‘Fordism’ and ‘flexibility’. The apparent dominance of the core firms within Japan’s keiretsu
networks leads us to follow Cowling and Sugden (1994, 1998) and view such sub-relationships
as being being governed from one centre of strategic decision-making.
It is in this spirit that the emerging re-orientation of Japanese industry, towards the use of
transnational production networks, must be appraised and understood. The historical
development in the post-Second World War of a heavy reliance upon subcontracting by the
leading car assemblers was undoubtedly conditioned above all else by a cost reducing imperative,
which in and of itself was contingent upon the wage differentials generated between employment
in the core firms and employment by subcontractors (for illustrative data see, for example,
Cusumano, 1985: 193; also Williams et.al, 1992). The resulting industrial structures, superficially
de-integrated and epitomised by close spatial proximity of supplier and user, together with the
surprising comparative-historical error which re-assigned the development of flexible production
systems capable of processing a wide selection of differentiated goods through integrated
facilities from the West (and in particular North America) to Japan, have encouraged a generation
of observers to conclude that here was evidence of a change in industrial structure, conduct, and
performance of an order which fully merited the label ‘paradigm shift’. This supposition is now
deeply embedded in the literature, but is dangerously misleading. Developments to which we
now turn imply instead a transitory arrangement, in which Japan’s leading firms, initially
supported and policed by Japanese state institutions, engaged in a series of cost-contingent sub-
contracting arrangements with low wage firms in the domestic economy, that have now given
way to global production strategies that seek wage advantages abroad overseas, unhindered by
‘commitments’ to small domestic keiretsu firms.
(4). Globalisation and the Japanese Economy
The preceding comments become especially relevant in the context of recent debate(s) concerning
the malaise presently afflicting the Japanese economy. In this respect the contrasting
contributions of Cowling and Tomlinson (2000, 2002) and Porter et al (2000) are particularly
noteworthy, since both analyses focus upon the changing nature of Japanese industrial
12
organisation and the role and efficacy of post-Second World War (Japanese) industrial policy,
although their understanding of the merits of state sponsored intervention, and of the roots of the
present crisis, differ sharply.
In the post-Second World War era Japanese industrial policy was proactive and energetic. In a
broad outline its main aspects are familiar ones, forming the basis (for instance) of Chalmers
Johnson’s (1982) model of the ‘developmental state’. According to Johnson (ibid:10), Japan’s
Ministry of International Trade and Industry (MITI) played an important strategic role in the
planning and nurturing of a market economy. MITI’s policies (for further brief details see
Cowling and Tomlinson, 2000: F362-F364; also Johnson, ibid) included selecting and promoting
industries that were identified as being ‘strategic’ from the perspective of the national economy,
which in the 1950s and 1960s comprised heavy industries such as electric power, iron and steel,
and shipbuilding, and in the 1970s and 1980s consumer durables like automobiles and
semiconductors (with more recent attempts to encourage high-tech industries like electronics and
computer research). Means employed to this end included a mix of measures aimed at protecting
domestic industries from import competition, combined with positive support given to Japanese
exporters. Policies were also designed to encourage the importation of foreign technologies
without inward Foreign Direct Investment (FDI), reflecting at least in part a concern on the part
of MITI that US-led transnationals would come by this route to dominate Japan’s domestic
markets at the expense of nationally-owned companies. Finally, these measures were
supplemented by the growth of banking institutions – the banking keiretsu – that provided
finance to industry at preferential rates of interest, thereby encouraging long-term domestic
investment.
Cowling and Tomlinson follow Johnson in that they accept a sympathetic account of the
positive role of industrial policy in Japan’s post-Second World War economic development,
endorsing the efficacy of MITI’s policies, and firmly rejecting any attempt to blame Japan’s
present difficulties on problems of over-regulation. At the same time, and drawing upon the
strategic decision-making approach to industrial organisation laid out in Cowling and Sugden
13
(1994, 1998, ibid), they argue that Japan’s current demise can partially be traced to the
subsequent rise to dominance of Japan’s large firms – both domestically and internationally – and
the cumulative effects of these firms’ pursuit of their own strategic interests to the detriment of
the national economy. In this respect, MITI’s industrial policies carried with them the seeds of
their own future failure, in that they generally favoured the activities of Corporate Japan and the
promotion of ‘national champions’, frequently at the expense of the smaller keiretsu firms.
Indeed, Corporate Japan was often successful in lobbying for changes in national policy to
pursue its own strategic goals (see, for example, Johnson, ibid: 68-74); in particular, the influence
of Corporate Japan within the echelons of MITI was apparent in securing a relaxation of the
restrictions placed on FDI [12]. This takes us to the crux of the source of apparent industrial
decline in Japan, namely the real effects upon the Japanese economy of the extraordinary growth
in outward Japanese FDI which has occurred since the late 1970s, moving Corporate Japan from
the status of being a ‘small marginal player’ in international production, with a 3% share of the
global stock of FDI in 1980, to a new world leader, second only to the Corporate sector of the
USA, with a 12% share by 1997 (Cowling and Tomlinson, 2000: F359).
The main contention here therefore is that an increasing tendency for Japan’s large transnationals
to develop their own transnational production networks and to outsource production through
their own overseas affiliates – at the expense of domestic sites – has served both to generate and
then exacerbate a ‘hollowing out’ of Japanese industry. Cowling and Tomlinson (2000: F370-
F379) provide a substantive mix of evidence to support their claims. In particular, they argue that
there has been a significant diversion of investment away from Japan’s industrial regions, while
the growth in global outsourcing has left Japan’s important domestic small firm sector
increasingly isolated and in a weaker bargaining position with their main contractors.
Consequently, during the 1990’s, Japan’s small firm sector experienced a significant decline in
order volumes and in its profitability, while there was a concomitant rise in small business
12. During the immediate post-Second World War period, both inward and outward Japanese FDI proposals weresubject to an authorisation procedure carried out by MITI, where approvals had to meet the strict conditions laidout in the 1949 Foreign Exchange and Foreign Trade Control Law and the 1950 Foreign Investment Law. Afterconsiderable lobbying from Japan’s large corporations, MITI relaxed these restrictions in 1971 and automaticallyvalidated outward FDI proposals without financial limit. The abolition of exchange controls in 1980 completed the
14
failures and bankruptcy rates [13]. They argue that this in turn, has contributed to lower
economic growth and higher unemployment in Japan.
Against this, Porter et al (2000) see the Japanese model of government and of proactive industrial
policy as an abiding source of microeconomic distortions that have served to stymie rather than
encourage effective industrial growth and development. Instead the authors argue that the real
basis for the post-Second World War success enjoyed by some segments at least of the Japanese
economy lies to a very considerable extent in a set of innovative organisational practices at firm
level, summed up under the heading "lean production"[14]. Their contention is that while firms
in a relatively small number of industries were able to realise significant advances internationally
on the basis of improved methods of production, these gains in operational effectiveness masked
deficiencies both in the mode of government and in the ability of the Japanese management model
to develop a "unique" market identity (ibid:88-89). Their conclusion is that because there are
very finite limits to the competitive advantages to be had from improved production methods,
once emulation by competitor firms first closes then eliminates the efficiency gap, the rise and
relative fall from grace of the Japanese industrial model can be explained by the initial appearance
of, and subsequent emulation of, new operational methods in production (ibid: 78-82).
At the risk of unduly caricaturing these competing perspectives, we therefore have:
a) An explanation of initial national success based on a proactive industrial policy, followed by
a relative decline resulting from a ‘strategic failure’ on the part of state authorities to anticipate
and curtail the self-interested activities of the economy’s giant corporations (Cowling and
Tomlinson, 2000, 2002).
b) An explanation of initial success based on the innovativeness in production of the economy’s
de-regulation programme (for further details see Mason, 1994; 21-25).13. For instance, the growth in (Japanese) global outsourcing contributed to a 33% decline in procurement fromdomestic keiretsu firms between 1985 and 1996, while keiretsu firms’ profit margins fell by approximately 40%over the same period. Small firm bankruptcies also rose to "unprecedented post-Second World War levels"(Cowling and Tomlinson, 2000, ibid: F373-F375).
1
leading corporations, followed by a relative decline resulting from ‘competitive convergence’ in
operational methods and exposure to the damaging effects of unwarranted state interference
(Porter et al 2000).
There must be doubts, however, regarding the viability of the stance taken by Porter et al. While
taking a relatively holistic view of ‘lean production’, as a set of ‘internally consistent’ and
‘mutually supporting’ practices, central stage is nonetheless given to a novel system of
manufacture purportedly developed by Toyota MC for purposes of coordinating discrete
activities at different stages of complex, multi-tiered production and supply chains. The
operating principles of this ‘model’ are discussed at considerable, but informal, length in Ohno
(1978), Womack and Jones (1996), and also in Aoki (1988:7-44; 1990b), and are specifically
singled out by Porter et al as the basis for lean manufacture (see Porter et al, ibid:70-71). The
core claim made on behalf of this production model is that it represents an organisational
breakthrough in the manner by which information on output requirements is assimilated with
current production and communicated between separate but vertically-cooperating production
processes. The supposed advantage duly accruing is that the adopting firm is thereby enabled to
expand the variety or width of selection of products offered consumers without incurring
penalties either in the form of delays as orders are processed or in rising buffer-stocks of parts
and products as a hedge against an uncertain composition of demand (see Ohno, 1978:37-40;
Aoki, 1990a:3-5). In fact each of these commentators goes so far as to suggest or assert that it
was this property of the model that facilitated the transition in Japan (and elsewhere) from
‘Fordist’ to ‘flexible’ production (in the particular instance of Aoki, for example, it is the basis
for his attempt to differentiate a J-mode of communication, predicated on ex post collation of new
consumer demands, from a traditional Western mode driven by principles of forecasting and ex
ante planning (see Aoki, ibid)). The problems with this story, and with the ‘theory’ of lean
manufacture, are twofold. Firstly, flexible methods of production and assembly in the ‘West’
predate their adoption in Japan. Secondly, formal modelling of the operating principles allegedly
characterising the Toyota system, as demonstrated in Coffey (2001), fails to substantiate the
14 A phrase invented and popularised by Womack et al (1990).
16
claims made on its behalf: provided materials conversion in production is not instantaneous [15],
volume of factory-work retained increases monotonically with the number of throughput
specifications, contradicting the basic thesis that there is a separation between stock-costs and
width of product selection.
On the other hand, the position taken by Cowling and Tomlinson is bolstered by recent
econometric work on the sensitivity of Japanese FDI to wage differentials. Tomlinson (2000)
augments a domestic production function for Japan’s machinery industry with relevant foreign
wage variables, an approach justified on the basis that this sector is highly exposed to the
activities of (pre-dominantly) Japanese transnational corporations, which in the aggregate control
a significant portion of Japan’s domestic industrial capacity (ibid:108). The inclusion of foreign
wage variables indicates the attractiveness of alternative sites of production vis-à-vis Japan,
which reflects the fact that transnationals take a global perspective on the location of production,
investment, and employment. Using a simultaneous equations estimator, Tomlinson then finds
that the determination of both domestic investment and employment in Japan’s machinery
industries is highly sensitive to changes in international wage conditions, and that this in turn
reflects the extent to which transnational activity has had a real effect within the sector. These
results would appear to indicate that Japanese transnationals have successfully integrated
production on a global scale. These findings, while providing tacit support for the ‘hollowing out’
thesis, are also inimical to one of the defining claims of the literature which focuses on Japanese
methods of production, namely that these favour the concentration of production activities in
localised districts involving both manufacturers and their supply networks. If true, this would
render both investment and employment relatively inelastic with respect to variations in
international wage rates.
This is not to suppose, of course, that foreign wage conditions have been the only factors
influencing Japanese FDI. In a prescient early commentary Cowling (1982:130-131) argued that
the emergence of the Japanese car industry as a ‘dominant’ element in the international car trade
15 A very weak assumption, since if conversion were instantaneous the literature would lack any rationale.
1
was characterised first and foremost by an asymmetric view of rivalry in which Japanese firms
– bolstered by state protection in their home markets – could see a substantial profit opportunity
in an "aggressive" stance over market shares of a type then eschewed by the prevailing oligopoly
groups. At the same time, a prediction was made that ‘accommodation’, and ‘stable’ relations
between competing oligopolists, would also re-appear over the longer run, after short-term
ameliorative action by Western Corporations and their respective state bodies. In particular, the
surge in direct investments in North America and Western Europe by Japanese assemblers
through the 1980s that took form in joint ventures with competitors could also be viewed in this
light, inasmuch as this provided the basis for effective "collaborative" arrangements (ibid:131) in
the sense of a platform upon which to reconstitute accommodatory outcomes, following the
initial aggressive period of forceful entry by Japan’s new global players. The reactions of
threatened Western oligopoly groups therefore, and the restoration of symmetric rivalries has
been one historic factor conditioning Japanese FDI: but the resulting supply networks are
essentially global.
If we return, therefore, to the debate between Katzner and Thiruvadanthi concerning the
applicability of self-interested maximizing behaviour to disparate ‘national’ or ‘cultural’ cases,
the answer which must surely be offered concerning the behaviour of Japanese firms is that the
cumulative evidence points towards self-interested profit maximising behaviour on the part of
the Corporate sector realised through conduct easily construed in ‘Western’ terms. The
emphasis given by commentators like Aoki to the novelty of Japanese production methods and
the supposed revolution occuring in the transition from ‘Fordist’ to ‘flexible’ manufacture – an
emphasis which is cumulatively weak on historical, conceptual, and empirical grounds, and which
is all the more surprising given that the initial Japanese bid for membership of dominant
oligopoly groups took the form of price competition at the lower end of the size and quality
spectrum – has overshadowed detailed study of the evolving relationship between state industrial
policy and the growth to dominance and policy independence of Japan’s giant transnational
corporations. The perspective supported in this paper is that the success of these corporations
was predicated on the support provided by the state, and that these corporations successfully
18
guided the orientation of state policy to the longer run detriment of Japan’s domestic economy.
The outcome - from the viewpoint of giant Japanese firms - are transnational production
networks which serve the private interests of a Corporate sector managed on lines easily
recognised by Western economists.
(5). Conclusion
In this paper we engage with two superficially disparate controversies. The first controversy
concerns recent developments in industrial organisation quite generally, where it is apparent that
prognoses for industry, at least as found amongst economists and social and political scientists
with an interest in the wider political economy, are currently characterised by two competing
strands of analysis. One strand emphasises globalisation, of obvious and particular relevance to
the development of complex logistical chains and transnational production and supply networks;
the other, taking as its point of departure a supposed historical contrast between ‘Fordist’ and
‘flexible’ production, as posited by writers like Piore and Sabel, tends to suggest that there is a
new ascendancy of production-forms conducive to de-integrated but stable production and
supply networks that are essentially ‘local’ rather than ‘global’ in scope. The second controversy
concerns the economic and industrial crisis in Japan, where it is possible to discern two emerging
lines of diametrically opposing argument at the level of the industrial economy: on the one hand
a sympathetic stance is taken on the past-effects of a proactive state-led industrial policy, and
the decline of the Japanese industrial economy is squarely attributed to at least a partial
consequence of the globalising activities of Japan’s self-interested Corporate sector; on the other
hand, commination of the Japanese polity and state industrial bodies like MITI runs hand-in-
hand with an explanation of past-successes which stresses the presumed advantages that
‘flexible’ Japanese manufacturers once had over their ‘Fordist’ counterparts in the West.
Upon close inspection the mutual dependence of the forms of these controversies becomes clear.
Resolution of the debate on Japan - inasmuch as this deals with the issue of transnational
activity – requires that a position be taken on the debate over flexibility. The supposition that
‘flexibility’ represents a break from ‘Fordism’ has been used to downplay the relevance of
19
globalisation of production for complex manufactured products, and as a consequence has
encouraged a viewpoint which is insensitive to the forces now hollowing out the Japanese
economy; in addition, this supposed transition is the basis of recent attempts to attribute the
post-Second World War success of Japan to novel modes of production at firm level, with state
industrial policy pushed to a subordinate position, or actively attacked as a damaging intrusion.
The contra-position taken in this paper is that this is not an acceptable position on historical,
conceptual, or empirical grounds, that Japan’s current economic crisis is at least in part a
consequence of the profit-seeking activities of its giant transnational producers, and that a
satisfactory discussion of the historic role and errors of Japanese state policy must proceed in
pace with a recovery of a more realistic – and observation based – study of evolving modes of
industrial organisation.
20
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24
Tab
le (
1a):
Toy
ota'
s C
ore Keiretsu
Supp
ly C
hain
Sour
ce:
Dod
wel
l Mar
keti
ng C
onsu
ltan
ts (
1997
).
C
ore
Par
tsF
unct
iona
l Par
tsIn
teri
or/E
xter
ior
Par
ts
Dat
a in
par
enth
esis
indi
cate
Ass
embl
er’s
equ
ity s
take
in th
esu
pplie
r
Body Parts
Engines
Fuel Injection Pumps/Fuel Tanks Steering
Transmission Parts
Other Core Parts
Brakes/Clutches
Carburettors/Mufflers
Heaters/Radiators
Pistons
Shock Absorbers
Other Functional Parts
Air Conditioning
Electrical Devices
Seats
Other Interior/Exterior Parts
Toy
ota
Mot
or
In-h
ouse
Pro
duct
ion
aa
aa
aa
aa
Aic
hi S
teel
(23
.8%
)a
Ais
an I
nd.
(34.
7%)
aa
Ais
an A
W (
41.0
%)
aa
Ais
in S
eiki
(22
.5%
)a
aA
isin
Tak
aoka
. (3
7.3%
)a
aA
raco
(75
%)
aa
Cen
tral
Mot
or W
heel
(22.
4%)
a
Chu
o Sp
ring
(23
.9%
)a
aD
enso
(23
.2%
)a
aa
Fuj
itsu
Ten
(35
.0%
)a
Futa
ba I
nd.
(13%
)a
aJe
co (
34.2
%)
aK
oito
Man
uf.
(19.
2%)
aa
Koy
o S
eiko
(21
.9%
)a
aS
hiro
ki C
orp.
(14
.3%
)a
aT
akas
him
aya
Nip
pats
u(2
4.2%
)a
a
Tok
ai R
ika
(30.
9%)
Toy
oda
Aut
o L
oom
(23
.1%
)a
Toy
oda
Gos
ei (
42.1
%)
aT
oyod
a Ir
on (
49.0
%)
aa
Toy
oda
Mac
hine
(22
.8%
)a
aY
utak
a Se
imit
su (
100%
)a
25
Tab
le (
1b):
Nis
san'
s C
ore Keiretsu
Supp
ly C
hain
C
ore
Par
tsF
unct
iona
l Par
tsIn
teri
or/E
xter
ior
Par
ts
Dat
a in
par
enth
esis
indi
cate
Ass
embl
er’s
equ
ity s
take
insu
pplie
r
Body Parts
Engines
Fuel Injection Pumps/Fuel Tanks Steering
Transmission Parts
Other Core Parts
Brakes/Clutches
Carburettors/Mufflers
Heaters/Radiators
Pistons
Shock Absorbers
Other Functional Parts
Air Conditioning
Electrical Devices
Seats
Other Interior/Exterior Parts
Nis
san
Mot
orIn
-hou
se P
rodu
ctio
na
aa
aa
aA
ichi
Mac
hine
(33
.1%
)a
aa
Cal
soni
c (3
3.4%
)a
aC
lari
on (
11.5
%)
aD
aido
Ste
el (
5.0%
)a
Exe
dy C
orp.
(25
.6%
)a
aFu
ji U
ni.
(34.
0%)
aIc
hiko
h In
d. (
20.8
%)
aIk
eda
Bus
san
(58.
0%)
aa
JAT
CO
(65
%)
aJi
dosh
a D
enki
(24
.8%
)a
aK
anse
i C
orp.
(30
.2%
)a
aK
asai
Kog
yo (
23.0
%)
aK
iriu
Mac
h. (
44.6
%)
aa
Mar
ui I
ndus
tria
l (2
7.3%
)a
Nip
pon
Car
b. (
23.8
%)
aN
issa
n Sh
atai
(42
.6%
)a
Tac
hi S
(20
%)
aT
enne
x (5
6.7%
)a
Tos
ok (
49%
)a
aU
nisi
a Je
cs (
29.6
%)
aa
aY
amat
o K
ogyo
(34
.0%
)a
aY
oroz
u C
orp.
(30
.8%
)a
Zex
el (
11.2
%)
aSo
urce
: D
odw
ell M
arke
ting
Con
sult
ants
(19
97)
26
Tab
le (
1c):
Hon
da's
Cor
e Keiretsu
Supp
ly C
hain
C
ore
Par
tsF
unct
iona
l Par
tsIn
teri
or/E
xter
ior
Par
ts
Dat
a in
par
enth
esis
indi
cate
Ass
embl
er’s
equ
ity s
take
in th
e
supp
lier
Body Parts
Engines
Fuel Injection Pumps/Fuel Tanks Steering
Transmission Parts
Other Core Parts
Brakes/Clutches
Carburettors/Mufflers
Heaters/Radiators
Pistons
Shock Absorbers
Other Functional Parts
Air Conditioning
Electrical Devices
Seats
Other Interior/Exterior Parts
Hon
da M
otor
In-h
ouse
Pro
duct
ion
aa
aa
aA
tsum
itec
(37.
5%)
aD
ensh
i Gik
en (
65.5
%)
aa
F.C
.C.
(20.
7%)
aF-
Tec
h (2
2.3%
)a
Had
sys
(16%
)a
Hir
ata
Tec
hnic
al (
33.4
%)
aa
Hon
da F
ound
ry. (
71.2
%)
aH
onda
Loc
k (1
00%
)a
aK
eihi
n Se
iki (
34.6
%)
aa
Mar
ujun
Sei
ki I
ndus
try
(14.
7%)
aN
issi
n K
ogyo
(47
.4%
)a
Sank
ei G
iken
(7.
7%)
aSh
owa
Cor
p. (
38.1
%)
aT
akao
Kin
zoku
Kog
yo (
48.8
%)
aT
okyo
Sea
t (22
.6%
)a
Tsu
zuki
Man
ufac
turi
ng (
20%
)a
aY
achi
yo I
ndus
try
(11.
3%)
aY
anag
awa
Seik
i (22
.2%
)a
Yut
aka
Gik
en (
83.0
%)
a
Sour
ce:
Dod
wel
l Mar
keti
ng C
onsu
ltan
ts (
1997
)
