The Evolution of Japanese Subcontracting

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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.

Evolutionary Development

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.



1. This account of the early history of Japanese subcontracting comes from traditional secondary sources. To analyze more recent events, Nishiguchi conducted 1,035 field interviews between 1983 and 1989, involving 813 people at 394 organizations in 14 countries. The core of his research is discussions using a semistructured interview format with 251 interviewees in 71 prime contracting firms and 320 interviewees in 172 supply and subcontracting firms for the automotive and electronics industries in 10 countries. In addition, in 1986, Nishiguchi distributed a mail questionnaire about the reasons for subcontracting as perceived by 20 large automotive and 20 large electronics firms in Japan. A fuller exposition of this work may be found in:

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

2. MCI later became the Ministry of Munitions.

3. In the past few years, economic growth has slowed, but competition continues to be fierce and product variety remains great.

4. Many companies outside Japan now have profit-sharing rules. Interestingly, in Japan, the split is generally 1:1; in the case of Ford Motor Company, the split is 2:1, with Ford taking the lion’s share. See: Automotive News, 1 August 1994, p. 1 and p. 36.

Additionally, the tendency of Japanese purchasers to not ask for a price lower than that expected in the second year is a detail often overlooked by non-Japanese incentive systems.

5. See, for example:

K.B. Clark, T. Fujimoto, and F. Dubinskas, “Product Development in the U.S., Japanese, and European Auto Companies” (Boston: Harvard Business School, collection of viewgraphs, 1987).

6. With the benefits of subcontractor grading and self-certification becoming increasingly apparent, automakers around the globe began to establish such programs in the 1980s. Ford Motor Company’s Q1 program and General Motors’ Supplier Assessment Program (SAP) are prominent examples.

7. S. Berger and M. Piore, Dualism and Discontinuity in Industrial Societies (Cambridge: Cambridge University Press, 1980).

8. R. Edwards, Contested Terrain (New York: Basic Books, 1979).

9. Ibid., p. 77.

10. Nishiguchi (1994).

11. Ibid., p. 187.

12. M. Piore and C. Sabel, The Second Industrial Divide: Possibilities for Prosperity (New York: Basic Books, 1984).

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

14. O. Williamson, Markets and Hierarchies: Analysis and Antitrust Implications (New York: Free Press, 1975); and

O. Williamson, The Economic Institutions of Capitalism (New York: Free Press, 1985).

15. Bounded rationality refers to the human mind’s limited capacity for formulating and solving complex real-world problems. Opportunism here is defined as the fulfillment of one’s own interests by means of guile, including lying, stealing, cheating, and incomplete or distorted disclosure of information.

16. A. Chandler, Strategy and Structure (Cambridge, Massachusetts: MIT Press, 1962).

17. R. Dore, Taking Japan Seriously (Stanford, California: Stanford University Press, 1987).

18. Ibid., p. 170.

Dore defined benevolence here as “something shown in relations between unequals, by superior to inferior, the reciprocal which is usually called loyalty” and goodwill as “the sentiments of friendship and the sense of diffused personal obligation that accrue between individuals engaged in recurring contractual economic exchange.”

19. For more details, see:

Nishiguchi (1994), pp. 181–185.

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