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Getting to Yes. Roger Fisher. The Snowball. Japanese firms often forego better deals with new partners in order to maintain long-term relationships with loyal partners. Egoists in such a situation would not trust each other's goodwill; yet, they are assured that their partners will not exploit them because of the nature of long- term incentives. This notion was congruent with that of Gambetta , in that trust is the result of the rational choice of avoiding the cost of uncertainty, even if this choice is not the best.
Given that the risk of uncertainty is thought to be bigger than the merit of changing partners, maintaining long-term relationships can be chosen without the belief concerning the goodwill of others. Hagen and Choe focus on collective sanctions as a mechanism for improving trust by reducing the incentive to cheat. They identify two tiers of sanctions existing in Japan.
Cooperative buyer-supplier relationships in Japan are maintained not only through sanction-supported institutional arrangements of subcontracting developed by companies, but also through social sanctions that effectively discourage potential cheaters from evading their contractual obligations. Social sanctioning, which is positively combined with institutional sanctions in Japanese supplier networks, plays a critical role in promoting trust among participants.
Information about a firm's reputation is effectively shared through formal and social networks among incumbents in the industry. In such circumstances, a firm's trustworthiness is appreciated not only by its current trading partners, but also by a large number of prospective partners. Since social sanctions work through and across individual contractual relationships, they can be effective in aligning profit-maximizing motivation positively with the motivation to act in the spirit of goodwill and trust among incumbents in an industry.
Notwithstanding those analyses from an economic standpoint, the question of why trust in business and society is typically presented in some places such as Japan , but not in others such as China has still not been answered. Hill attempts to answer this question with the unique norms and value system of the Japanese that has been inherited since the Tokugawa period According to his article, the norms and value system of the Tokugawa period were derived from Confucianism and traditional agrarian village life Hill, They are: 1 group identification; 2 collective responsibility; 3 loyalty; 4 reciprocal obligations; 5 harmony; and 6 individual performance.
These attributes were believed to have originated from Confucianism and agrarian village life during that period. This norm has resulted in alleviating transaction costs of control and coordination that might be paid by the head of an organization by binding people together tightly Hill, Agrarian village life, another one of the attributes, has been viewed as facilitating group identification.
To make the land suitable for rice paddy cultivation, irrigation systems had to be developed, which required the collective work on the part of individuals and collective control over the water supply system. Because this task necessitated cooperation among individuals to ensure that a sufficient supply of both labor and water would be ongoing, the members of a group consequently started to share a common identity of being in the same group. However, while these explanations provide a clear view about the effects of history on current networks of trust in Japan, they are not enough to identify the origins of Japanese uniqueness because China has also had a historical background in which Confucian philosophy was pervasive, and civil society was governed by agrarian principles for more than a thousand years.
One possible explanatory variable that I would like to identify in this paper is the social system. While sharing commonalities with Chinese countries in terms of the strong influence of Confucianism and the agrarian mode of production, Japan has developed a unique social system, contributing to the creation of social capital.
Moreover, the development of the Japanese social system was independent from the common philosophical and economic traditions shared by other countries. In the next section, how social systems have been institutionalized, and how they have functioned in social capital formation with which Japan can differentiate itself from China will be discussed, along with a historical examination of its development.
Historical Formation of Social Capital in Japan By identifying the distinguishable features of Japanese business organizations by comparing them with Korean and Chinese counterparts, Whitley maintains that the Japanese social system contains some characteristics that have been established in a historical context. First, the Japanese social system can be characterized by political and economic pluralism. There was a lack of central authority and control. Consequently, the ability of the central political authority to control economic development and capital accumulation was restricted Whitley, Such a hierarchy was a mode of conduct for high-ranking officials to obey the king unconditionally.
Under such conditions, modernistic forms of business have already prospered, independently of central power, even before the Meiji restoration in , when the modern state first appeared in Japan. During the Tokugawa period, independent mercantile wealth expanded considerably, despite official disdain for merchants and attacks on merchants' power. Many merchants invested their profits in land reclamation, thus becoming land owners, and began to blur the formal boundaries between the aristocracy and merchants. By the time of the Meiji restoration, much concentration of private, family-controlled economic power had become established, which dominated the economic system Whitley, The Mitsui family business, for instance, had developed into one of the largest financial holding companies in pre-war Japan.
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Today, the Mitsui family enterprise survives as a giant business group. It was founded in the 17th century and developed into a large chain-store enterprise during the 18th and 19th centuries. Large merchant houses in Tokugawa Japan were organized into powerful guilds that were more stable and autonomous than their Chinese counterparts Whitley, Economic pluralism developed through Japanese history, persisting in the form of keiretsu today. Keiretsu ranges from very small affiliations to enormous and horizontally organized corporate networks that include approximately of the largest and best- known companies, including Mitsui, Sumitomo and Mitsubishi, many of which had been developed since the pre-war period.
These organizations own or control more than an estimated 12, companies, accounting for a third of Japan's business capital and a quarter of its sales Cutts, The second characteristic concerns how power was legitimately claimed and how obedience was justified. Historically, Japanese leaders acquired control through competition and relied on the ability to sustain political and social order.
In order to understand the uniqueness in the relationships between leaders and subordinates, feudalism thriving in the Tokugawa period in Japan needs to be scrutinized. Bhappu examined the differences between Japanese feudalism and other forms of feudalism experienced in Western European countries, as well as in China.
Whereas feudalism in Europe was based on the "rights and duties" defined by the relations of the lords and vassals, feudalism in China was based on the Confucian dominance-submission relationships between the family patriarch and his family members. The feudal system in Japan possessed some elements of the dominance- submission pattern found in China; nevertheless, it also had features of the European rights and duties conception Bhappu, As mentioned above, feudal lords were competing to expand their spheres of power.
Feudal lords were able to attract peasants away from imperial estates by protecting them against forced labor service for the imperial authority. The cost of protection charged to the peasants was their loyalty. The notion of reciprocal service between a lord and his subordinates dominated the Japanese feudalist social system.
It was close to a temporal loyalty, based on the temporal contract that may break if one of both individuals defied his responsibility rather than if they had maintained a strong and absolute relationship. They increasingly regarded themselves as administrators of the collective entity and began to regard merit and competence as the key attributes of superior status and rank rather than inherited positions. The systemic integration of ruling groups with peasants, providing military protection in exchange for transferring land tenure rights, ensured that vertical loyalties were weaker to households or extended kinship systems than in China Whitley, This traditional characteristic also persists in the keiretsu of today.
Keiretsu does not have a hierarchical structure, and each member firm has an equal relationship in shareholdings and transactions Abe, The most conspicuous difference in the family system between Japan and China can be identified in the succession system. In the Chinese family, the family property could be divided among the surviving sons of the patriarch at the time of his death.
In these cases, each son would set up an independent household. In other cases, the brothers continued managing the property, but their sons divided the estate. As generations passed, the sizes of the businesses were reduced because of the divisions among surviving offspring. Because the authority of the Chinese patriarch was only a lifetime phenomenon, The Chinese family business typically spanned only one or two generations Bhappu, In contrast, succession in Japanese families is quite different.
Succession is defined by filling the position of the successor, and by the continuation of the successor in carrying out his or her duties. Typically, only one son would be able to inherit the family property, and the rest of the sons would have to leave from their own family branches Scott, However, adoptive children were allowed the same status as biological children in their legitimacy to take over land, meaning that an adoptee could be included in the same feature ranking Bachnik, This difference has resulted in Japanese family businesses thriving through several generations, unlike China.
The size of the main business was unchangeable because only one successor took it as a whole. Meanwhile, if the leaving sons formed their own family branches and businesses, they were incorporated as affiliates of the main business. This system was the origin of the unique main-branch corporate system, known as the honke main -bunk branch system. In addition to this system enabling families toexpand their distribution channels geographically, it also provided a way for corporate businesses to perpetuate themselves as entities from one generation to another Bhappu, The family members allowed the main and family branches to take on varying shares of the family enterprise while also maintaining the unity of the business.
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The discussions above can be illustrated as shown in Figure 1. Social structure in which a central authority is absent facilitates competition among actors for attracting loyalty from subordinates.
Keiretsu and management practices in Japan – resilience amid change | Emerald Insight
Furthermore, this competition, in turn, expands the spheres of trust into wider ones beyond kinship. Meanwhile, the three factors embedded historically in the Japanese social system enable the Japanese to form a unique trust network that has played a role in the type of social capital contributing to the emergence of grand enterprises achieving economies of scale.
Figure 1. Factors embedded in the social system to form trust as social capital in Japan Discussion on Key Findings Hitt, Lee and Yucel argues that Asian firms may have a competitive advantage over Western counterparts based in countries with more individualized cultures that make it difficult to develop and leverage firm-level social capital.
Their assumption was that, unlike Western culture, Eastern culture contains a collectivistic element that has played a contributive role in social capital formation through which people cooperate willingly and sometimes sacrifice individual interests for the sake of collective wellbeing. He identified trust among strangers beyond kinship as an explanatory variable for economic results.
As discussed in this paper, trust is not only a component, but also a constituent of social capital. He contrasted Japan and China and found that the former has accumulated social foundations of trust, which cannot be found in the latter. This difference was claimed to have been a source of the availability of large-scaled heavy industry necessitating cooperative investment in Japan. Moreover, he pessimistically predicted that the Chinese economy will face impediments due to a lack of a social trust foundation because the strong preference of kinship still thrives in Chinese countries Fukuyama, a.
Throughout the process, three key findings can be explicated.
First, as Coleman and Hagen and Choi indicate, some types of social capital are realized as a social sanction. The Japanese system of inter-firm relationships is operated by trust accumulated through a long period of time. Japanese business firms seldom betray their partners. However, I doubt that such trust between firms could be maintained if it were not for the social sanctions identified by many scholars. It is difficult for trust, as an instrument for maximizing self-interest, to be called trust, insofar as trust, by nature, is a type of psychological benevolence.
Second, the unique Japanese trust basis of social capital had originated from the condition of pervasive pluralism; in other words, the absence of control and power at the center of the society. Whereas targets of personal loyalty, king and parents were determined and unchangeable in China, Japanese people were not enforced to obey to specific persons eternally. Thus, there was competition among the ruling class to acquire the loyalty that was necessary to expand their influence. In a pluralistic context, trustworthiness among people is a substitute for a centripetal force that may have officially existed in China.
The Japanese family system is more open to outsiders than its Chinese counterpart, which has the inclination of exclusiveness for those who come from outside of its bloodlines.
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In spite of complex connectedness among firms, the nature of keiretsu is evolving types of family enterprises, in that keiretsu is on the same continuum as the honk-bunke enterprise system, which was a by-product of the unique family succession system. In this sense, relationships based on firms within the same keiretsu can be viewed as an expansion of kinship networks in nature. One difference between Japanese and Chinese kinship is found in its flexibility concerning membership. In order to verify the actual existence of trust embedded within Japanese culture, further studies focusing on the relationship- building practices of Japanese firms with outside countries are required.
Recommendations for Future Research The findings and discussions in this paper have several interesting implications for future research. In reality, financial and equity relations in the vertical keiretsu structure also exert a strong impact on corporate stability.
Strong equity control of the car manufacturer over its suppliers in vertical production networks result in a stable and long-term demand for parts supplies. By and large, these unique features of the keiretsu organization are expected to yield long-term economic prosperity and reciprocal commitments within the network. Costs The late s saw a circle of scholars and policy makers beginning to pay more attention to the disadvantages of keiretsu system. Author of Alliance Capitalism: The Social Organization of Japanese Businesses, Michael Gerlach, argues that the endurance of keiretsu alliances has been interpreted as a formidable impediment to the entry of Western business competitors into Japanese markets.
These market environments may preclude Japanese firms from practicing more cost-effective sourcing strategies at the global standard. It is often argued that the decade-long Japanese recession after the bursting of the bubble was further exacerbated by the negative features of the keiretsu form of governance. Many keiretsu car manufacturers tend to improve cost competitiveness by shifting abroad and then establish international production networks with more independent firms capable of producing quality products at a competitive price.
There is rich empirical research on the negative effect of keiretsu on company performance. Research was conducted using a sample of Japanese firms to examine whether keiretsu-affiliated companies under- perform independent firms. Shifts in keiretsu boundaries In the late s, changes in industrial conditions such as the introduction of deregulation, the boom of e-commerce and a number of takeovers of Japanese companies by foreign hands have led to significant changes in the nature and scale of keiretsu supply chain networks.
Its group members are requested to strengthen the product quality and technology independently of, rather than dependently on, Nissan. There is a clear divide between Toyota and Nissan. The former indicates the maintenance of group-centred inter-firm relations, while the latter is characterized by the advancement of de-keiretsu-ization. Former Nissan companies became independent suppliers, serving various car manufacturers.
Independence enables keiretsu companies to create new customer relationships with other car assemblers more easily. At the same time, there are automobile suppliers who switched their keiretsu parents.
The case of the Toyota keiretsu group Toyota firmly holds onto its group suppliers at the domestic level. Despite the fact that the internal ties of the Toyota keiretsu group have increased, Toyota has tried to reduce its dependencies on Denso in high-end electronic components through advancing its in-house capability. Taking a close look at a coordinated Toyota keiretsu formation abroad, Toyota actively encourages its group companies to compete and cooperate within and beyond keiretsu organization.
For example, Toyota and its group suppliers actively establish new partnerships with Western firms in Europe. Toyota keiretsu suppliers strive to achieve a high degree of customer diversification, while supplying car parts to the Toyota factories in Europe.