Explain the Keiretsu inter-structure, and discuss why it is no longer the case that the keiretsus are a source of competitive advantage.
Topic: Explain the Keiretsu inter-structure, and discuss why it is no longer the case that the keiretsus are a source of competitive advantage.
This topic deserves our special attention on Asian business groups because they are closely identified with the region’s industrialisation and subsequent economic growth. They are well known by various names, such as Korea’s Chaebol, China’s Qiye Jituan, and especially Japan’s Kereitsu that we will explain according to its impact within inter-firm structure and also discuss why it is no longer the case that the keiretsus are a source of competitive advantage. We have firstly to know that the keiretsu has played a pivotal role in the economic success in Japan and it has already been mentioned that the state supported the former of cartels as one element of industrial policy. Following this idea, in order to achieve economic growth, Japan also actively supported the re-formation of industrial groups from parts of the Zaibatsu, as well as the diversification into several news areas of the economy, such as inter firm-structure. To have a well-defined cohesion in our plan, we going to explain, firstly and briefly, the precedence of industrial financial change and the beginning of Japan’s keiretsu, secondly the keiretsu inter-firm governance and structure, finally the case of keiretsus’ problems as source of competitive advantage.
Keiretsu has a long history. During the decades leading up to Japan wartime economy, the Zaibatsu, a group of firm played an important role of Japanese economy. This group bank helped to raise capital that was used in expansion projects. In others words, generally during this period, banks consolidated, increasing the power of Zaibatsu related to banks. After post- war II, seriously damaged by the effects of the war, Japan tried to set out to establish its industries while the occupation forces endeavoured to abolish the Zaibatsu organisational structure in an attempt to undermine the strong conglomerate networks that controlled the Japanese industrial enterprise. In this time, the concept of “harmonious” work environments wasn’t present as worker dissatisfaction; however the successful adaptation of Western practices and improvements in working conditions would later be perfected and used effectively to compete with the west-providing Japan with an eventual competitive edge. Despite the eradication of the strong Zaibatsu system, post World War II industrial collaboration continued, connecting the government, companies and banks by means of the more modern keiretsu version of industrial group collaboration. In fact, it is this system that is presently the subject of reform in the wake of the recent Asian Financial Crisis of 1997. We have to note that recent economic crises have led Japan to restructure industry and financial practices without forgetting lessons from the past. This is the reason why this interaction between organizational practices and the economic environment provides a significant situation in which to consider emergent.
Noting that the Japanese firm use the competition approach that suggests the Japanese system of more flexible constraints on agency costs and distorted distinct between shareholders and it represents an essential source of Japan competitive advantage. Lincoln and Gerbach (2004:15) define japans business groups as “clusters of independently, managed firms, maintaining close and stable business ties, cemented by governance mechanisms such as presidents’ councils, partial cross-ownerships and interlocking directorates’. In an effort to capture the fundamental nature of Japanese inter-firm, some scholars distinguish two basic forms of Japan’s keiretsu. The first one is the conglomerate or horizontal Keiretsu, centred on a main bank or holding company such as Mitsui, Sanwa or Fuyor. The second form is the quasi-vertically integrated, by meaning “Giant companies “or kaisha that focus upon two or three core industries; this form also includes corporations such as Toyota and Toshiba. Shimotoni (1997) further distinguishes between corporate complex, corporate groups and subcontract system; each is arranged hierarchically and tied together by equity, debts links, interlocking directorates, dispatched personnel and current contracting relationships. Unfortunately, the problem with those forms is that they don’t adequately capture the full extent of their complex structure. Obviously, inter-firm vary in the degree to which they are linked by debt, equity, managerial exchanges and trading relationships and the extent to which these links are reciprocated. In holding several affiliations and nominally independent firms, the cohesions of inter-firm may tend to ebb and flow, strengthens and weakens over time in response to markets opportunities. Consequently, relations governance tends to be more reciprocally interdependent and less hierarchical than those found in other Asian Business Group. To illustrate this governance, the following scheme explains these interactions among the big six inter-market groups. We can see Mitsui and Toyota are characterised as the classic horizontal and vertical keiretsu. However, while possessed of much autonomy, Toyota is historically linked with Mitsui, Nissen is linked with Fuyo most of Toyota’s group affiliates, such as Hino and Nippon Denso, deal with Toyota’s main banks, Mitsui and Tokai. Because the extent and strength of debt, equity and trading linkages between firms vary so greatly, some affiliate firms are closely linked with their main bank and business partners and densely and centrally situated within a particular complex or group, while more peripherally-linked affiliates endeavour to preserve their autonomy.
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Example of interactions between major keiretsu and other groups
Six major industrial groups Vertical integrated groups
Two medium industrial Relationship
Groups led by leading banks
In according to a number of comparative advantages such large groups, Japan is dominated by keiretsu in terms of ownership, organisation, and management. Some dysfunctions can intervene within inter-firm structure and can affect them dramatically, if they don’t take any predispositions. These dysfunctions can be explained in three ways. The first way, we know that the firms are dependent of one another. Within the complex inter-firm structure, firms are profoundly entrenched and in this circumstance, a firm's vital resources may span firm limits and may be fixed in inter-firm routines and processes. Take for example, one firm may be indebted a lot of business processes or resource components to other firms within the network. Without them, the firm may not be able to carry on running the business. From the viewpoint of transaction cost, the insolvency of a firm is much expensive for other firm within the inter-firm structure. For that reason, they will be predisposed to rescue the member firms that become to struggle in case of financial problems. In the second way, our approach of dysfunction can also determine the qualities of network ties. To demonstrate our viewpoint, take for example General motors and Toyota in order to analyze their relationships with suppliers. In its strategy of inter-firm, General Motors hasn’t cultivated a steady network of supplier firms. To a certain extent, its correlation with supplier firm is more market-based and the relationship between General Motors and its suppliers may not sure and variable based on the price suppliers offer to it and other factors. On the one hand, Toyota tried to build long-term relationships with its supplier companies by actively facilitating knowledge sharing, transferring management practices such as operations management, transferring its personnel to suppliers. As a consequence, Toyota's network ties with its suppliers are further than transaction levels. On the other hand, it doesn’t without difficulty change its suppliers even if other suppliers offer lower prices to it. Instead, Toyota encourages its suppliers to lower their production costs by providing consulting services, information about cost reduction technologies, and so on. As the case of Toyota, many Japanese companies within keiretsu networks made investment for establishing prosperous network ties. Thus, letting members go into economic failure means that they are losing valuable ties that are developed by important investment. This may be one of the reasons that member firms try to rescue troubled firms within networks. The third way put in evidence cultural factors. Some scholars argue that Japanese firms emerge to have been successful at generating valuable network ties in part because of a country-specific institutional environment that fosters goodwill trust and cooperation (Dyer & Singh, 1998). They challenge that in other countries, for example, USA and Russia may not be able to imitate that kind of network structure because of an inability to replicate the communally complex of institutions surrounded in the Japanese institutional environment. The theory of individualism-collectivism may provide a view about the risk buffering system within Japanese firm networks. Some cultures such as USA develop citizens who are principally individualistic and others such as Japan develop citizens who are absolutely collectivistic (Moorman & Blakely, 1995). Because collectives tend to weigh more on group benefits than individual benefits, the group of people in collectivistic culture may be easy to foster the helpful relationship. In these relationships, unselfish behaviours such as rescue others without any return can happen quite often.
In the 1980s and 1990s, Japan is composed of dual economy between the keiretsus and non-Keiretsus. Trading and bank were hold by the former by 30-30% and the latter by 67-70%. We also add the keiretsus structure cooperated with and received strong support from the Japanese government. In the late 1980, the keiretsus contributed 17% of the total sales and 18% of the total net profits of all Japanese businesses, thus they employed 5% of Japan’s work force.
In the mid -1980s, the global economic and financial order that was established at Bretton Woods in 1944 was under pressure from several sources and subject to revision. The cooling of Cold War tensions allowed Western governments to reconsider the institutions of international trade and finance, such as free trade, privatisation, liberalisation and deregulation. In this period of time, in Asia the spectre of communism had receded with Japan securely located within the Western sphere of influence and the Plaza Accord in September 1985 signalled the beginning of a new era in Japan economic and corporate development and marked the beginning of a period called the Endaka and the end of Japan’s export-oriented industrialisation. This accord resulted in numerous unintended consequences that shaped the future of the keiretsu inter-firm structure. With the appreciation of the yen, Endaka was to produce a more insidious effect, depressing Japanese interest rates to historically low levels that were negative in real terms. Long-term negative real interest rates set in motion an asset-price spiral in real estate and equity market prices, creating a bubble economy. Increases in the value of equity allowed firms to reduce their dependence on bank debt and, as many firms were also cash-flow positive in this period, they could finance their expansion through retained profits; together, these factors allowed firms affiliated with business groups to loosen ties with their main bank. When the bubble economy collapsed in 1991, the brutally deflating asset values instigated a decade-long depression in the financial and corporate sector. Now the long reaction time of the keiretsu companies in relation to external changes gradually became a major disadvantage for them. This is the reason why by the early 1990s, the advantages that a keiretsu provided to its affiliated members began to diminish and also one of reasons that why it is no longer the case that the keiretsus were a source of competitive advantage.
There is accumulating evidence that the financial market performance of Japanese firms has been in relative decline since 1991. However, it is important note that decline is relative. Nolan (2001) also observes that even after the long stagnation of the 1990s, many of Japanese firms was less significant than their stagnant stock market performance. However, the continuing malaise in Japan’s keiretsus as source competitive advantage generated scepticism about the value of blank-led corporate governance. The focus began to turn to the negative aspects of business group affiliation. Several recent studies provide evidence that departs from the profit redistribution and insurance hypotheses, casting the keirestus in less glowing terms. Main banks are viewed as imposing a variety of costs on their affiliates in a manner that captures the rents and expropriates other classes of shareholder while powerful keiretsu members exploit weaker firms and utilise complex corporate structures to exploit minority investors by selling low-quality assets in equity markets. However, contrary to the previous studies, Gedajlovic and Shapiro (2002) find that firms within keiretsus tend to have poorer performance and a greater variance than do independence firms. They speculate that there is a possible explanation for their contradictory results: most previous failed to control for key firm-specific factors that would have a direct and considerable impact on firm risks. They also found that keiretsus tend to be older and larger in size than independent firms.
The other reason is the earlier in the 1970s, Japan started exporting heavy industrial goods and importing raw material and fuels. But the country continued to be closed economy keeping out foreign products, foreign capital and foreign management. Non-Japanese firm began to cry foul over the exclusionary trade practices in Japan. Without access to the national distribution system, foreign firms found it difficult a dent in the Japanese market. For example cross-ownership between Japanese automobile manufacturers and their dealers acted as on obstacle to the entry of foreign players.
Finally, predictions that keiretsus are becoming obsolete and their businesses are likely to dissolve are overstated. During a long period of rapid growth, Japanese were hailed as a model of development worthy of emulation in mature and developing economies alike. After a long period of inertia and the fitful and uncertain restructuring, should the Japanese keiretsu still be regarded as exemplary model of reform? Khanna and yafeh (2005) are not confident that japans’ corporate groups hold many lessons for business groups that encounter problems in other emerging economies’ markets. They contend that Japanese business groups are fundamentally different from groups found in other parts of the world: they are centred on banks, they are not controlled by families, they haven’t alternative organised mechanism of joint decision making, and the vertical keiretsu are essentially operational elements.
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