Japanese subcontracting is complex and evolutionary, a result of the interplay of historical events and human agents. Consequently, no single theory —whether dualism, flexible specialization, transaction cost economics, or cultural specificity (which we discuss later) — is sufficient to explain it. In this paper, we detail the evolution of Japanese industrial sourcing and view subcontracting as a movement toward collaborative manufacturing based on problem-solving principles.1 We argue that the evolution is best explained by political, economic, technological, and strategic factors, not by a single theory. Today, the major advantages of Japanese subcontracting are the economic benefits of interfirm problem solving that ensures the continuous production of high-quality, low-cost products.
Japanese subcontracting after the Meiji Restoration can be divided into four periods: early, wartime, post-war, and modern. Each period is distinct, which makes generalizing hazardous. Taken together, however, they are evidence of the importance of political, economic, technological, and strategic factors in the evolutionary development of subcontracting.
Dualist System Emerges
In the nineteenth century, labor immobility in Japan resulted in substantial regional wage differences. By the turn of the twentieth century, however, such differences had narrowed, and workers frequently moved from one employer to another seeking better working conditions. There is little evidence of company commitments to lifetime employment at this time.
We can trace the emergence of segmented labor markets in Japan to a period just after World War I, when the labor market divided into two areas: (1) large firms, especially those in the heavy manufacturing industries, and (2) the rest of the economy. This stabilization resulted from a deliberate management strategy. Business expansion during the wartime economic boom made it imperative that, along with extensive investments in facilities, labor be more finely differentiated. Although the navy arsenals and Mit-subishi Shipbuilding had already adopted this practice around the time of the Russo-Japanese War (1904-1905), it was not common throughout the economy until World War I.
Along with the division of labor came firm-specific skills. How jobs were classified and tasks defined differed substantially from one firm to another, so workers had to be trained according to new requirements. Of course, it would make no sense to train workers if they left for better opportunities. Worker education, therefore, needed to coexist with a more stable labor situation.
A powerful way to stabilize labor was to link length of service and incremental pay and also introduce retirement pay schemes.