Explaining Japanese production networks in Asia

Why have Japanese electronics firms adopted a different approach to the

organization of their Asian production networks than American and European

firms? And why have they organized their Asian production networks differently

from their production networks in North America and Europe? I suggest that

nationality of ownership does matter, and can be traced to definable institutional

features of the Japanese production system, particularly the absence of tight

financial control and a domestic bias of the procurement system. Yet these

national characteristics must be placed in the context of other industry and even

firm-specific factors. First, until the early 1990s, Japanese firms focused on very

different product groups and markets from American firms, i.e. consumer

electronics and household appliances. Second, as latecomers to international

production, it took Japanese firms time to develop the capacity to manage IPNs.

As a result, networks were organized in a highly centralized manner to minimize

risk. Third, East Asia’s close proximity to Japan enabled Japanese firms to

implement centralized and Japan-centered IPNs in a relatively efficient fashion.

And, finally, firm size and strategic focus have shaped the organization of Japanese

IPNs.

Peculiar features of the domestic Japanese production system

There is no doubt that certain basic features of the domestic Japanese production

system have shaped the organization of Japanese IPNs in East Asia.First, until

the “bursting of the bubble economy” in 1991, one of the key features of

corporate governance in Japan has been a lack of tight financial control (Dobson

1995; Stopford 1998; Kester 1996) that has forced Japanese firms to establish

other forms of control.

Kester distinguishes two types of corporate governance: those

associated with the separation of ownership and control (the control of “agency

costs”), and those associated with the establishment and maintenance of

contractual exchange among separate enterprises. Kester (1996) shows that the chief shortcoming of Japanese governance is its low ability to control…

agency costs…. In modern Japanese business history, controlling agency

costs has been of second-order importance…. So long as attractive real

growth opportunities were abundant and product and factor market rivalry

was fierce, corporate managers were unlikely to deploy resources in a highly

disciplined way. High rates of real growth, moreover, can do much to

attenuate disputes among corporate stakeholders by relieving pressures to

compare one group’s gains to those of another from a zero-sum

perspective. So long as growth could be sustained, virtually all stakeholders

benefited and conflict among them could be held to a minimum.