Firm-specific

Finally, firm-specific features also play an important role in shaping the

organization of international production; I focus here on two: size and strategic

focus.

One of the peculiar features of Japan’s international production networks in

electronics is the substantial role played by small and medium-sized enterprises

(SMEs).21 SMEs have higher OPRs than their large, vertically integrated

counterparts. This is true for smaller firms that produce final products but have a

quite narrow product focus, such as Aiwa (whose OPR exceeds 85 percent) or

Uniden (with an OPR close to 100 percent), but it is also true for the hundreds of relatively small subcontractors and component suppliers that have moved

production offshore to Southeast Asia and China.

This finding is somewhat surprising. Small firms have limited resources and

capabilities, many of them lack strong proprietary assets, and international

production involves transaction costs that most SMEs may simply be too small to

shoulder. Small firms can bypass such size-related barriers to internationalization if

they are part of a network centered around a core firm that reduces the

transaction costs involved in international production, such as the hierarchical

supplier networks that traditionally have characterized the Japanese electronics

industry. Small firms can also compensate for their size-related disadvantages by

limiting the geographic scope of their foreign investments. While large firms have

dispersed their production activities around the world, medium-sized firms cluster

their overseas operations in Taiwan, Korea, and Singapore; small firms are

concentrated mainly in Taiwan, but recently have expanded into China. Despite

a rapid growth of international production, smaller Japanese electronics firms rely

on a very limited international division of labor.

Even if product and size are held constant, however, it is important to

underline that substantial differences may remain across firms. This can be seen by

looking at consumer electronics and comparing Sanyo, the pioneer in establishing

Asian production networks, with the Matsushita group and Sony.

Sanyo’s founder was the brother-in-law of Konosuke Matsushita, who took

over most of the operations of the Matsushita group when it was broken up

under the US Occupation Authority. In Japan, Sanyo always remained a secondtier

competitor, and compensated with an aggressive early shift into international

production. In the early 1970s, Sanyo developed the so-called “one-third”

strategy for manufacturing capacity—one-third domestic manufacture for the

domestic market; one-third domestic manufacture for foreign markets (especially

higher-end segments); and one-third foreign manufacture for foreign markets. Sanyo aggressively focused its international production and sourcing on East Asia

in the second half of the 1970s, much earlier than any of its Japanese rivals.

Matsushita Electric Industrial Co. Ltd (MEI) is the world’s largest manufacturer

of consumer electronics and household appliances. Since the mid-1980s, it has

diversified aggressively into communications and factory automation equipment,

semiconductors, and video software, with the result that today the share of

industrial electronics and electronics components in its overall sales is roughly

equal to the share of consumer and household goods. For quite some time, this

giant conglomerate has been run like a loose network of (almost) independent

business units, with headquarters playing the neutral role of an arbiter. As long as

markets kept growing, this loose network organization was widely considered to

be a great strength, as it enabled the company to remain reasonably flexible

despite its huge size (Imai 1988). However, as demand growth slowed the hidden

costs of excessive decentralization and decision autonomy, such as duplication,

foregone economies of scale and self-generated price pressures became apparent.

Matsushita’s core competencies traditionally have been size-related advantages

in distribution and high-end manufacturing (in specialized affiliates like

Matsushita Kotobuki). It had tight control over the domestic distribution

channels for consumer electronics, and thus its expansion activities in East Asia

were geared more to the heavily protected domestic markets than to the

establishment of low-cost export platform production. Once Matsushita decided

to move to export platform production, however, it was able to do so on a

massive scale, rapidly neutralizing whatever first-mover advantages Sanyo may

have developed.

Sony, together with Sanyo, has one of the highest OPRs among large

diversified Japanese electronics firms; yet, its overseas production has remained

focused almost exclusively on the United States and Europe. Only since the late

1980s has the company begun to invest seriously in the development of an Asian

production network. Sony’s approach to international production reflects some

peculiar features of this company that have shaped its strategy. In 1952, when

Sony purchased a license for Western Electric’s transistor patent and began to

produce transistor radios under the model name Sony, the company decided to

focus on the high-income and high-growth markets in the United States and

Europe. Right from the beginning, the firm sought to develop its own brand name

image. Akio Morita, the company’s charismatic co-founder, spent considerable

time and energy on developing direct links with large US retailers to ensure that

Sony’s products would receive sufficient floor space.

Owing to the tremendous success of this strategy, Sony was under much less

pressure to internationalize than its rivals, who lacked similar image recognition

and concentrated on Asian markets. Sony was also reluctant to shift to export

platform production in East Asia and invested heavily in the automation of its

European and North American plants, including those in Mexico. Today Sony’s

Asian production networks are still relatively underdeveloped, but they are also

much less burdened than Sanyo and Matsushita with “deadwood,” surplus

capacities and duplication.