Success as the Source of Failure?: Competition and Cooperation in the Japanese Economy

The Clinton administration’s pressures on the Japanese government in 1995 to increase U.S. companies’ share in Japan’s automobile and auto parts markets and Eastman Kodak’s accusation that Fuji Film uses unfair competitive practices in the Japanese market are the latest in a long series of assertions that Japanese companies collude with each other and with the government to suppress competition. Those who make such assertions tend to focus on three elements — industrial policy, the keiretsu (enterprise groups), and lifetime employment — that suppress competition in the Japanese business system. U.S. negotiators’ view that Japan’s “closed” system fosters collusion and restricts competition also leads them to insist that their efforts to help U.S. firms in the Japanese market are also in the interests of Japanese consumers.

Given Americans’ insistence on the virtues of competition, it is surprising that so many people see no inconsistency in believing that Japan had nearly four decades of economic growth with a fundamentally collusive business system. A more compelling argument is that, in the 1970s and 1980s, Japan’s business system was fueled by competition, not collusion, and it was this competition that powered Japanese economic growth.

Today, however, the sustainability of the key features of Japan’s business system in the face of a five-year recession and the strong yen is in doubt. The prospects for change in the Japanese industrial system as a consequence of these forces are much stronger than any pressures that the U.S. government generates. In this article, I examine the nature of competition in Japan, the implications of its industrial policy, the keiretsu, and the Japanese employment system and assess the prospects for fundamental change in the near future.

Competition and Industry Structure

Traditional economic theory espouses the view that free competition is the source of sound economic development. It maximizes total social welfare and forces companies to be innovative and to price their goods and services competitively. In this view, monopolies threaten the efficiency of markets, reduce innovation, and slow economic growth. On the other hand, individual firms pursue strategies to reduce competition — to find “niches” where they have a monopoly or a commanding, dominant position and to drive competitors to the wall. Weak firms either go out of business (in the pure competition model) or are acquired by strong firms trying to increase their dominance.

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References

1. Data from W. Adams, The Structure of American Industry (New York: Macmillan, 1990).

2. The number of auto manufacturers in Japan is variously counted as ten or eleven, depending on whether Nissan Diesel is counted separately.

3. H. Odagiri, “Profitability and Competitiveness,” in K. Imai and R. Komiya, eds., Business Enterprise in Japan: Views of Leading Japanese Economists, translated by R. Dore and H. Whittaker (Cambridge, Massachusetts: MIT Press, 1994), pp. 179–193. Odagiri admits that the time frames of the Japanese and the U.S. and British data do not quite match — the British and U.S. data are from a comparable time period about half a decade earlier.

4. H. Itami, Nihon no keiei to wa nani ka? (What Is Japanese Management?) (Tokyo: Nihon Keizai Shimbunsha, 1982).

5. Data presented and discussed in Odagiri (1994).

6. A recent article in the Nihon Keizai Shimbun, using data on all publicly listed manufacturing firms in the United States and Japan from 1980 through 1995, showed that the U.S. firms consistently outperformed the Japanese firms on return on equity by a considerable margin. In 1995, for example, the ROE for Japanese firms was 4.5 percent; for U.S. firms, 16.5 percent. See:

Nihon Keizai Shimbun, 17 April 1996, p. 1.

7. Michael Porter, for example, attributes much of Japan’s industrial success in key industries to domestic competition: “The proliferation of domestic rivals, coupled with demand-side pressure and goals heavily oriented toward market share, creates a tinderbox of innovation and change” (p. 412). However, as Porter points out, where Japanese industries have seen fewer players and less competition — telecommunications services and airlines, for example — there has been less innovation, greater profitability, and a performance level below international standards. See:

M. Porter, The Competitiveness of Nations (New York: Free Press, 1990).

8. C. Johnson, MITI and the Japanese Miracle (Stanford, California: Stanford University Press, 1982).

9. “Picking Losers in Japan,” The Economist, 26 February 1994, p. 69.

10. See, for example: “Mighty Mitsubishi,” Business Week, 24 September 1990, pp. 98–107.

11. Kosei Torihiki Iinkai (JFTC), Kigyo shudan no jitai ni tsuite (“On the Current Structure of Business Groups”) (Tokyo, 1991).

12. Kosei Torihiki Iinkai (JFTC), Gyoumu-teikei ni kansuru houkokusyo (“Special Survey on Business Tie-ups”), 16 November 1976.

13. Nihon Keizai Shimbun, 13 April 1996. At the time, Sumitomo Bank’s own financial problems precluded it from providing the help for Mazda.

14. I. Nakatani, “The Economic Role of Financial Corporate Grouping,” in M. Aoki, ed., The Economic Analysis of the Japanese Firm (Amsterdam: Elsevier, 1984), pp. 227–258.

15. See, for example:

J. Womack, D.T. Jones, and D. Roos, The Machine That Changed the World (New York: Rawson Associates, 1990); and

T. Nishiguchi, Strategic Industrial Sourcing: The Japanese Advantage (New York: Oxford University Press, 1994).

16. Womack et al. (1990), p. 157. The recent problems of General Motors, when a strike at a small brake supplier closed down production lines, illustrates the perils of a single-supplier policy, which the Japanese system avoids.

17. K. Sakai, “The Feudal World of Japanese Manufacturing,” Harvard Business Review, volume 68, November–December 1990, pp. 38–49.

18. J. Abegglen, The Japanese Factory (Glencoe, Illinois: Free Press, 1958).

19. V. Pucik, “Promotion Patterns in a Japanese Trading Company,” Columbia Journal of World Business, volume 20, Fall 1985, pp. 73–79.

20. See, for example:

R.E. Cole, Japanese Blue-Collar: The Changing Tradition (Berkeley, California: University of California Press, 1971); and

Strategies for Learning: Small-Group Activities in American, Japanese, and Swedish Industry (Berkeley, California: University of California Press, 1989);

T. Abe, Hybrid Factory: The Japanese Production System in the United States (New York: Oxford University Press, 1994).

21. See, for example:

I. Nonaka, “Toward Middle-Up-Down Management: Accelerating Information Creation,” Sloan Management Review, volume 29, Spring 1988, pp. 9–18.

22. Nihon Keizai Shimbun, 26 April 1995.

23. According to an article in the Nihon Keizai Shimbun (26 April 1995, p. 1), the accumulated pretax operating profits of Japanese publicly traded nonfinancial companies between 1976 and 1990 was ¥52 trillion. During the same period, the total value of Japanese stocks traded on the Tokyo Stock Exchange (Section 1) increased by ¥17 trillion.

Acknowledgments

An early version of this paper was presented in 1995 at the annual meeting of the Association of Japanese Business Studies in Ann Arbor, Michigan. I would like to acknowledge the help of Professor Eleanor Westney in producing this version.