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The development of modern business in Japan.

Although it has not been recognized very clearly, Alfred Chandler offers a dual definition of modern business. One definition focuses on the formation of "managerial hierarchies;" this refers to the rise of professional managers, a development that eventually leads to the separation of management and ownership. The advent of the managerial firm, or managerial capitalism, symbolizes modern business.(1) Chandler's other definition focuses on management structure and emphasizes the U-form (Unitary-form) or M-form (Multi-divisional-form), both of which are organizational types closely associated with the development of modern, large-scale firms. The modern firm usually has the characteristics of a managerial organization and employs either the U-form or M-form (typically the latter) structure.(2)

Chandler's model, based on this dual definition, can be regarded as a convergence theory. If we conduct our analysis at a very abstract level and consider the fundamental trend in business organizations, there is indeed considerable evidence pointing toward convergence. Yet this convergence process takes place along different paths, especially at the outset, and there are significant time-lags where different nations were involved. Each country has had different development characteristics. We can characterize the systems as: competitive capitalism in the United States; personal capitalism in the United Kingdom; cooperative capitalism in Germany; and group-enterprise capitalism in Japan.(3)

In contrast to Chandler's model, Alexander Gerschenkron's model of development emphasized the different nature and paths of latecomer economic growth. Latecomers were frequently able to gain advantages: larger scale; state-of-the-art technology; special financing systems; and political intervention in the form of industrial policy. By adopting advanced technology from developed countries, latecomers could rapidly catch up with the early starters. Gerschenkron's model, which stressed the various paths followed in the development of capitalism, indicated that the business enterprises of latecomers would necessarily have different characters.4 Gerschenkron's model thus provides a non-convergence theory.(5) I will use these two models in my examination of the development of capitalism in Japan.

The Formative Years from the Late Nineteenth Century to World War II

One of the most remarkable characteristics of Japan's modern economic development was the appearance of zaibatsu, i.e., conglomerates with the following features: product diversification; family ownership; and nation-wide eminence. These zaibatsu tended to have close connections with government. For that reason, they were called "political merchants," although they were engaged not only in commerce but also in manufacturing and mining.(6)

We can look in more detail at three examples, using the best-known zaibatsu: Mitsui, Mitsubishi, and Sumitomo. In Mitsui and Sumitomo, powerful professional managers had control. While the Mitsui family and the Sumitomo family were almost the only stakeholders, it was the professional managers who directed these zaibatsu. The owners' say was limited to final authorization, and the professional staff had the actual managerial capabilities. In contrast, the Iwasaki family, the owners of Mitsubishi, had direct control because it was a newly-developing firm.(7) It remained an "entrepreneurial firm" in the sense that its founders still owned and managed the enterprise, whereas Mitsui and Sumitomo, which already had long histories lasting several hundred years, had evolved past that stage. Mitsubishi's case is quite similar to that of the Korean chaebol which developed after World War II.(8)

Mitsubishi, however, employed a large number of university graduates and ultimately it too created a managerial hierarchy. Organizational capabilities thus played a critical role in Mitsubishi, just as they did in the similar cases of Du Pont and the German family firms.(9) Furthermore, there was in the case of Mitsubishi a partial separation of ownership and management even before World War II. In Japan, managerial capitalism was thus evolving, even though in a different form than it was in the U.S. In Japan, ownership remained in family hands.

The zaibatsu were characteristically diversified, but they used the holding company form or H-form, not the U-form or the M-form which Chandler depicted as "modem." Despite this difference, the zaibatsu succeeded in developing modern, effective structures, using organizational forms that we can call "group enterprise capitalism." This form was different than American capitalism, but both were increasingly coordinated through the visible hand of a managerial style of organization.

In the beginning, Mitsui and Mitsubishi especially maintained close relationships with the government. The government tried to foster industrialization by establishing and running state-owned factories and mines. But these efforts did not, for the most part, succeed, and the government sold the public organizations to the zaibatsu, which rapidly expanded as a result of the acquisition of these assets. Initially, the zaibatsu and the government were thus closely connected. But political relationships of this sort carry the risk that political circumstances will change. The leaders of the zaibatsu gradually realized that too close a connection with the government might be dangerous and began to distance themselves from politics.(10)

It is nevertheless true that Japan's industrial policy fits the Gerschenkron model very well, even though government policy was not particularly successful in promoting the evolution of modern firms. Rather, private economic powers such as the zaibatsu were instrumental in developing Japan, while the government's policy was most effective in developing infrastructure. The government tried for a time to do more than that, but it then backed away from direct investment, and eventually, the zaibatsu became less involved in politics.

Japan in the Post-World War II Period

After the defeat of World War II, Japan experienced a drastic change in its economic system. The occupation army forced the dissolution of the zaibatsu, which were thought to be one of the driving forces behind the war. The General Headquarters of the Allied Powers ordered the "voluntary" dissolution of the zaibatsu and prohibited the use of zaibatsu names, such as Mitsui, Mitsubishi, and Sumitomo. For some years, each of the companies of the former zaibatsu was isolated, with no special organizational ties or network with the other companies.(11)

With the end of the occupation, however, the old constituent firms began to meet and exchange information. The main reason they drew together and reestablished their special relationships was to ensure protection against unfriendly takeovers by outside interests. They began to hold regular meetings of presidents and secretaries. This trend toward consolidation accelerated in the 1960s in a further effort to bolster protection against takeovers by foreign companies. In this way, intermarket keiretsu, like the Mitsui group, the Mitsubishi group and the Sumitomo group (the direct descendants of prewar zaibatsu) were formed. In these inter-market keiretsu (currently, the word keiretsu is virtually equivalent to kigyo shudan(12)), family ownership no longer existed and mutual shareholding among member companies became deeply entrenched.

These inter-market keiretsu do not have an hierarchical structure, and each member firm has an equal relationship in shareholding and transactions.(13) With this transformation, a thorough form of managerial capitalism, with complete separation of ownership and management, was established in Japan. This fully-achieved managerial capitalism (an extreme form, even compared to the United States) was partly due to the U.S. occupation forces and partly to the continuation of the prewar trend toward control by professional managerial hierarchies separated from ownership.

This secular trend fits very well in the Chandlerian model, as does the ubiquity of managerial firms in Japan. But it is worth noting that the change took place in a different form, through mutual-shareholding among firms, and not in the classical form of dispersed shareholdings in a centralized corporation.

Each member of the keiretsu is a large firm in itself, with numbers of subsidiaries and affiliated firms, each of which make a member firm a parent company. This hierarchical keiretsu is created by various spinoffs and acquisitions. This particular form, which differs from the ideal type posited in the Chandler model, can be called "hierarchical" because it is structured along the lines of parent/subsidiaries "affiliated" companies (at times, identified by the euphemistic expression of "subcontracting" companies). Although these large firms with many subsidiaries and affiliated firms have the multi-divisional structure which Chandler underlined as that of the modern firm, in Japan they also have an industry-wide H-form (Holding-company form).

Some scholars hold that the hierarchical keiretsu (such as the Toyota group, the Matsushita group, the Toshiba group, the Hitachi group, the Canon group, the Honda group, the Sony group, and others(14)) is much more important than the inter-market keiretsu (namely, the Big Six kigyo shudan, including the Fuyo group, the DKB group, and the Sanwa group, in addition to the aforementioned Mitsui, Mitsubishi and Sumitomo). The strength of the inter-market keiretsu is debatable(15) because its functions are limited to particular activities like protection from outside interests, establishment of prestige, and the promotion of large-scale interfirm projects. In contrast, the strength of the hierarchical keiretsu is beyond doubt since it is the basis of the Japanese management system(16) and gives to the nation an international competitive advantage, as I will explain later.

Japan's capitalist development thus follows a distinctive path, as Gerschenkron suggested, to the sort of managerial capitalism that Chandler emphasized. Basically, the two Chandlerian themes, the rise of managerial capitalism and the shift to coordination through the visible hand, apply to Japan. But recent developments in the United States and Japan raise doubts about this interpretation of modern business evolution.

The Japanese Management System (JMS)

The JMS was established in the 1950s and 1960s: it included a new form of labor management, involving, for instance, life-time employment; the seniority system; enterprise unions; flexibility through job rotation; quality control circles; and respect on the part of industrial engineers for on-site experience (thus, a close relationship between industrial engineers and shop floor workers). The JMS was in particular based on hierarchical keiretsu.

The establishment of hierarchical keiretsu (which could be described as multilayered production and distribution networks involving vertical interfirm integration) paved the way for the just-in-time system. Hierarchical keiretsu made a parent company slim and made it desirable to purchase from suppliers. Accordingly, it was a JMS form of "outsourcing" and "downsizing," two of the vogue concepts in management circles in recent years. These hierarchical keiretsu evolved by spinning off successful parts as quasi-independent companies, while also using acquisitions to extend and reconstruct their networks.(17)

Chandler's model teaches us that bigness is beautiful, an idea that has aroused strong opposition, especially in recent years. Put differently, Chandler contends that large-scale operations and integration within firms are imperatives for the development of modern firms through a three-pronged investment in manufacturing, marketing, and management.(18) But recently, outsourcing and downsizing have come to be regarded as crucial elements of business strategy. Instead of scaling up and diversifying, we see more and more U.S. (and Japanese) firms spinning off subsidiaries(19) and tightening their strategic focus, changes that are seen as indispensable for achieving competitive advantage.

During the years since 1970, when the weaknesses of the American style of big business were becoming apparent, the JMS was becoming more competitive on a global basis. This was particularly true in such assembly-type manufacturing as automobiles and electrical products.(20) The lean production system of Japan is dominant in these two industries.(21) By way of contrast, we must consider the venture capital business in the United States, which attracts our interest because of its agility. In biotechnology, software, and other industries, recent developments make us ask: Is big really beautiful? Chandler has provided his answer to this question in his recent articles and in Scale and Scope. He discussed the difficulties of large, U.S.-style enterprises in the section titled "When Large Is Not Logical" in his article(22) and distinguished "investment-oriented mergers and acquisitions" from "transaction-oriented mergers and acquisitions."(23) He classified industries into three categories: high-tech industries; low-tech industries; and stable-tech industries. He concluded that investment along traditional lines was still important and American firms still did it well in high-tech industries (e.g., chemicals, including pharmaceuticals, and computers), but it no longer sufficed in stable-industries (e.g., automobiles and iron and steel). In high-tech industries, the performances of U.S. firms have generally been strong because they continued to invest; but the U.S. firms in stable-industries performed poorly because they did not invest enough to keep their competitive advantage.(24)

While Chandler's interpretation is persuasive, it does not sufficiently account for the many eases of venture businesses such as Microsoft and other successful enterprises of that sort. To be sure, in the last two hundred years, firms have become bigger and bigger, more and more integrated, and more diversified by utilizing economies of scale and scope. Firms have, as Chandler indicated, adopted the U-form and then the M-form. But they have also adopted different forms like the H-form of the hierarchical keiretsu. This new form, which is especially suitable to lean production systems like the Toyota Kanban System,(25) is now the mainstream of development in assembly-type manufacturing.

From a long-term historical perspective, it seems that some of the most important trends that Chandler identified are now being reversed. This is especially true if we compare developments during the Third (electronic related) Industrial Revolution with the Second. If we consider the development of networks (and the keiretsu is a sort of network) or the increasing importance of venture business, the goal of organizational flexibility seems to be central to the basic flow of business development. Organizational flexibility dictates that structural forms should and can change according to the shifting demands of the environment (especially the market and technological environments). As Chandler acknowledged, competition has intensified,(26) and research and development have become more and more crucial to business success. In such situations, small businesses can utilize state-of-the-art-technology thanks to the changes associated with the Third Industrial Revolution and can have relatively easy access to venture capital. In some cases, "large" has become "not logical," continuing the trend that began when the more flexible M-form replaced the U-form of organization.

Conclusion

The development of modern business in Japan, broadly speaking, arrived at the same Second-Industrial-Revolution endpoint as the United States, but it did so by following a different path. Managerial capitalism, that endpoint, is characterized by the separation of management from ownership. Japan's capitalism achieved this end in the period between the late nineteenth century and the occupation after World War II. In this regard, Japan's brand of capitalism was more organization-oriented than that of the Chinese firms or Korean chaebol. Although all three are in East Asia, the Chinese and Korean businesses were different. Blood-relationships and family ownership were paramount, which was not the case in Japan. In this regard, Japan's managerial capitalism was unique and was even more complete than that of the United States.

In Japan group-enterprise capitalism prevailed, in the form of zaibatsu in the pre-war time and keiretsu in the post-war years. The latter form of management structure, in particular hierarchical keiretsu, was the pre-requisite for lean production, a central characteristic of the Japanese management system. This structure was different from the typical U-form and M-form which developed in the United States. Like businesses in the United States and Germany, Japanese firms achieved coordination through managerial organizations, not through the market. In this sense, the Chandlerian model is applicable to Japan. But the Gerschenkron model is particularly persuasive in the Japanese case when we look at the converging forces reshaping the system at a deeper level; Gerschenkron is especially useful when we examine the process by which Japan arrived at managerial capitalism and coordination through organization.

Present trends, however, seem to be moving in a direction different from managerial capitalism, away from bigness and economies of scale and scope. Institutional investor capitalism,(27) downsizing, and outsourcing are gaining ground. Even in Japan's keiretsu, some businessmen are now stressing the importance of non-keiretsu transactions. If these trends continue, the Chandlerian model will have to be revised in significant ways insofar as Japan and the other industrial powers are concerned.

1 Alfred D. Chandler, Jr., The Visible Hand: The Managerial Revolution in American Business (Cambridge, Mass., 1977), 1-12. For a useful discussion of the managerial firm, see Kesaji Kobayashi and Hidemasa Morikawa, eds., Development of Managerial Enterprise (Tokyo, 1986).

2 Alfred D. Chandler, Jr., "The United States: Seedbed of Managerial Capitalism," in idem and Herman Daems, eds, Managerial Hierarchies: Comparative Perspective on the Rise of the Modern Industrial Enterprise (Cambridge, Mass., 1980), 9-40; Oliver E. Williamson, "Emergence of the Visible Hand: Implications for Industrial Organization," in ibid., 186-87.

3 Alfred D. Chandler, Jr., "The Emergence of Managerial Capitalism," Business History Review 58 (1984): 503.

4 Alexander Gerschenkron, Economic Backwardness in Historical Perspective (Cambridge, 1962), chap. 1.

5 Some scholars hold that Gerschenkron's model indicates that convergence will take place if we look at development over a very long time-span. While that may be true, it is obvious that Gerschenkron stresses the differences between the early starters and the latecomers. They do not follow the same paths.

6 For a comprehensive study of the zaibatsu, see Hidemasa Morikawa, Zaibatsu: The Rise and Fall of Family Enterprise Groups in Japan (Tokyo, 1992).

7 For a brief history of the Iwasaki Family, see Etuso Abe, "Iwasaki, Yataro," in International Encyclopedia of Business and Management, ed. Malcolm Warner (London, 1996), 2407-409.

8 For the Korean chaebol, see Alice H. Amsden, Asia's Next Giant: South Korea and Late Industrialization (New York, 1989), 243-86.

9 See Alfred D. Chandler, Jr., Scale and Scope: The Dynamics of Industrial Capitalism (Cambridge, Mass., 1990), 145, 495-6.

10 Morikawa, Zaibatsu, chaps. 1 and 2.

11 See Johannes Hirschmeier and Tsunehiko Yui, The Development of Japanese Business (London, 1981). See also Etsuo Abe, "Japanese Business History," in International Encyclopedia of Business and Management, ed. Malcolm Warner (London, 1996).

12 The word keiretsu has a peculiar history. Originally, it was used for the kigyo gurupu (group) like Toyota, Matsushita, and Hitachi; afterwards, for the most part, it was used by American government officers, businessmen and scholars, most of whom misused it (or, to be charitable, they used it in a different way than it was used in Japan). They implied that it referred to kigyo groups such as Mitsui, Mitsubishi, and Sumitomo. Nowadays, under the influence of such misuse, Japanese have become familiar with the inexact way to use the word. Now Japanese have come to use the word keiretsu to mean both types of organization. Accordingly, keiretsu is almost equivalent to kigyo shudan. See for example, Mark Mason, American Multinationals and Japan: The Political Economy of Japanese Capital Controls, 1899-1980 (Cambridge, Mass., 1992), 205-206. For more on this subject see Masahiro Shimotani, Nihon no Keiretsu to Kigyo Gurupu (Keiretsu of Japan and Enterprise Group) (Tokyo, 1993), 228-32.

13 For information on the Japanese keiretsu, there are several good works. On inter-market keiretsu, see Michael L. Gerlach, Alliance Capitalism: The Social Organization of Japanese Business (Berkeley, Calif., 1992). For keiretsu in the automobile industry, see Michael J. Smitka, Competitive Ties: Subcontacting in the Japanese Automotive Industry (New York, 1991). For the electrical industry, Mark W. Fruin, The Japanese Enterprise System (Oxford, 1992). For the contemporary keiretsu, Kenichi Imai, "Enterprise Groups," in idem and Ryutaro Komiya, eds., Business Enterprise in Japan (Cambridge, Mass., 1994), 117-140. For a balanced comparison of Japan and the United States, see Thomas K. McCraw, ed., America versus Japan (Boston, Mass., 1986). For secular trend in strategy and structure, see Yoshitaka Suzuki, Japanese Management Structure (London, 1991).

14 In most cases, major Japanese firms form hierarchical keiretsu and frequently are also members of inter-market keiretsu. Toyota is a member of the Mitsui group as an observer; Hitachi is a member of three kigyo groups, i.e., Fuyo, DKB, and Sanwa. As this suggests, the affiliation of the two firms is not very strong. Canon is a member of Fuyo but is mainly an independent firm like Honda and Sony. But Honda and Sony have main banks (Mitsubishi Bank and Mitsui Bank, now Sakura, respectively) which belong to inter-market keiretsu. Matsushita too is independent but has a close connection with Sumitomo.

15 Weinstein and Yafeh offer an interesting hypothesis that the reason for lower imports in sectors where there is a formidable presence of inter-market keiretsu is not collusion; they suggest that it is, instead, intense competition. This suggests that the inter-market keiretsu have substantial power. David E. Weinstein and Yishay Yafeh, "Japan's Corporate Groups: Collusive or Competitive? An Empirical Investigations of Keiretsu Behavior," Journal of Industrial Economics 43 (Dec. 1995): 374.

16 On Toyota's keiretsu and production management, see Masaru Udagawa, "The Development of Production Management at the Toyota Motor Corporation," Business History 37 (April 1995): 107-119. See also Etsuo Abe and Robert Fitzgerald, eds., The Origins of Japanese Industrial Power (London, 1995) and Tsunehiko Yui and Keiichiro Nakagawa, eds., Japanese Management in Historical Perspective (Tokyo, 1989).

17 See, for example the experience of Toyota. Some of Toyota's core firms were created by spin-offs. Toyota Automobile itself was separated in this manner from Toyota Jido Shokki (a producer of automatic looms). But a number of large affiliated companies became members as a result of acquisitions.

18 Chandler, Scale and Scope, chap. 2.

19 The case of Furukawa, Fuji Denki, Fujitsu, and Fanuc provides a typical spin-off case in Japan. Furukawa (a holding company) formed Fuji Denki (electrical products) with Siemens; then Fuji Denki spun off Fujitsu (computers); furthermore, Fujitsu spun off Fanuc (robot producers). For more detail, see Seiichiro Yonekura and Hans-Jurgen Clabsen, "Innovation by Externalization: A New Organizational Strategy for the High-Tech Industries - Fuji Denki, Fujitsu and Fanuc," in Japanese Business Success: The Evolution of a Strategy, ed. T. Yuzawa (London, 1994), 39-64.

20 Nick Oliver and Barry Wilkinson, The Japanization of British Industry: New Developments in the 1990s (Oxford, 1992), chaps. 8 and 9.

21 For Toshiba's case, see Fruin, Japanese Enterprise System.

22 Alfred D. Chandler, Jr., "The Enduring Logic of Industrial Success," Harvard Business Review 90 (March-April 1990).

23 Alfred D. Chandler, Jr., "The Competitive Performance of U.S. Industrial Enterprises since the Second World War," Business History Review 68 (Spring 1994): 22-23. Chandler denounced "transaction-oriented mergers and acquisitions" because they did not look to the long-term health of the enterprises.

24 Ibid., 23-57.

25 For more detail, see T. Ohno and Y. Monden, eds., Toyota Seisan Hoshiki no Shin Tenkai (New Development of Toyota Production System) (Tokyo, 1983).

26 Hidemasa Morikawa is critical with the interpretation that the deterioration of large industrial enterprises in the United States and elsewhere was due to the unprecedented competition since the 1960s. See Morikawa, "The View from Japan," Business History Review 64 (Winter 1990): 725.

27 Japanese managerial firms were firmly built on mutual-shareholding, in which professional managers held virtually total power. Usually, they were able to devote themselves to long-term management, without intervention from shareholders, because they mutually sought to protect their positions at each company.

In the United States from the 1970s on, institutional investors such as pension funds and mutual funds have become extremely influential. Decision-making in large companies now tends to be shaped in part by institutional investors. This was an unexpected phenomenon from the perspective of classical managerial capitalism. Is the notion of managerial capitalism dated? And is the present time the age of institutional investor capitalism?

It can be argued that the fundamental characteristic of managerial capitalism is its long-termism, as Chandler emphasized in comparing it with British family capitalism. He criticized the British system due to its conservativeness. That system, he said, produced a myopic perspective, which derived from the belief that the family's prime objective was to keep its assets; as a result there was little appetite for aggressive investment in production, distribution and personnel. See Scale and Scope, 390.

Today, American business, which was thought to be in the vanguard of managerial capitalism, appears to be strongly influenced by institutional investors such as CALPERS; this influence is turning it towards short-termism. In Japan, institutional investors such as insurance companies are so far tightly locked into stable cross-shareholding. In that sense, Japan remains in the heyday of managerial capitalism.

Yet, with the advent of a mature economy, Japanese institutional investors are becoming more demanding on dividends and are as conscious of share prices as their American counterparts. In Japan too, the maturing of the economy may be directing the system toward institutional investor capitalism. If that is our common future, something Chandler certainly denies, all of the advanced economies may be entering a new stage of development. For Chandler's position see Chandler, "Competitive Performance," 9, 21, 57. And see also idem, "Managerial Enterprise and Competitive Capabilities," Business History 34 (1992): 29-39.

ETSUO ABE is professor of business history at the School of Business Administration of Meiji University, Japan.
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