R E V I E W S
Japanese keiretsu: Past, present, future
Jean McGuire
&
Sandra Dow
Published online: 14 June 2008
# Springer Science + Business Media, LLC 2008
Abstract This article reviews major theoretical and empirical work on vertical and
horizontal Japanese keiretsu. We first outline the history, characteristics, and strategic
and performance implications of each type of business group. We then discuss
changes in the Japanese economy during the post-1992 Japanese economic decline
and their implications for the persistence and continued benefits of each form of
inter-corporate grouping followed by a discussion of empirical findings regarding
the continued role of keiretsu in the Japanese economy. The review concludes by
exploring areas of future research into the evolution of keiretsu ties and their
implications.
Keywords Business groups . Japan . Keiretsu . Corporate governance
Keiretsu are established and commonly recognized networks of Japanese firms.
Japanese industrial organization has long been characterized by two important forms
of inter-corporate linkages. Historically, six major horizontal keiretsu dominated the
industrial landscape of Japan. Complementing these horizontal keiretsu are vertical
keiretsu usually organized around a major industrial firm and its buyers and
suppliers. Examples of these groupings are those centered around major automobile
Asia Pac J Manag (2009) 26:333
–351
DOI 10.1007/s10490-008-9104-5
We are grateful for the helpful comments we received from Mike Peng (Editor-in-Chief) on an earlier draft
of this manuscript. The authors also thank the Social Science and Humanities Research Council of Canada
(Grant 410 2006 1468) and the Fonds Québécois de la Recherche sur la Société et Culture (Grant 2007 SE
111772) for their research support. The opinions expressed are those of the authors and do not necessarily
reflect those of the granting agencies.
J. McGuire (
*)
Department of Management, Ourso College of Business, Louisiana State University, Baton Rouge,
LA 70808, USA
e-mail: mcguire@lsu.edu
S. Dow
Department of Finance, École des Sciences de la Gestion, Université du Québec à Montréal,
315 rue Sainte-Catherine Est, Montréal, Quebec H2X 3X2, Canada
e-mail: dow-anvari.sandra@uqam.ca
manufacturers such as Toyota and Honda. The objective of this paper is to review
research on keiretsu and propose directions for future inquiry. How was this research
done in the past? What are the main streams at the present? How will the future of
this research evolve?
Accomplishing this objective by addressing these crucial questions implies
several challenges. First, keiretsu are deeply embedded in Japanese industrial
organization and the Japanese business system. Therefore, while it might be
tempting to approach keiretsu from the framework of economic efficiency or
effectiveness, such an approach would not capture the multi-dimensional role of
keiretsu. Second, the two types of keiretsu differ significantly in structure and
function. Third, the decade long recession in Japan during the nineties coupled with
significant regulatory reform diluted keiretsu ties, reducing the benefits of affiliation
and accentuating the costs. In this article, most attention will be directed to
horizontal keiretsu due to their historic role in the Japanese economy and the larger
body of research on these groupings. However, we will also discuss vertical keiretsu,
as they have been identified as an important factor in the growth of the Japanese
economy.
In discussing the structure of these keiretsu, it is important to note that they are
characterized by permeable and evolving boundaries, differing degrees of inclusion,
and multiple ties (Lincoln & Gerlach,
). Any discussion of keiretsu structure
must necessarily over-simplify the complex and deeply embedded nature of keiretsu
ties in the Japanese economy. Indeed, the distinction between
“vertical” and
“horizontal” groupings is itself a generalization, as there is often significant overlap
between the two types of groupings, for example the Mitsubishi horizontal and
production-centered groupings, and the overlap between the Toyota (vertical) and
Mitsui (horizontal) groups.
Horizontal keiretsu
The Japanese economy has traditionally been dominated by six major horizontal
keiretsu which developed over a number of years. Three keiretsu (Mitsui, Mitsubishi,
and Sumitomo) are descendents of pre-war zaibatsu, while the other three (Dai Ichi
Kango, Fuyo, and Sanyo) developed around major banks during the post-war period.
Membership of horizontal keiretsu is diversified (Lincoln, Gerlach, & Ahmadjian,
). Recent mergers, however, have reduced the number of horizontal keiretsu to
four. In 2000, Sumitomo and Mitsui merged to become the Sumitomo Mitsui
Banking Corporation while Sanwa became part of the Bank of Tokyo Mitsubishi
group in 2001. These developments are in fact an outcome of the significant
regulatory and economic change in Japan throughout the last decade. In a later
section we address the impact of these changes.
Ties among keiretsu firms are complex. In the context of horizontal groupings,
however, we will focus on lending and equity ties, and to a lesser extent, personnel
ties. The ownership structure of firms is dominated by group holdings, which range
by some estimates from 23%
–42%, with reciprocal holdings prevalent (Gerlach,
; Johnston & McAlevey,
; Prowse,
; Sheard,
). These
reciprocally held shares tend to be rarely traded. Significantly, keiretsu ties do not
334
J. McGuire, S. Dow
necessarily imply large individual stakes. Rather, multiple ties create a disperse, yet
powerful, ownership network.
Although Japanese firms have traditionally relied heavily on bank financing, the
bank-centered nature of horizontal keiretsu makes such banking ties especially
important. Lending ties are reinforced by other forms of ties, particularly equity
holdings and board memberships (Berglof & Perotti,
; Hwang & Kim,
;
Kaplan & Minton,
; Morck & Nakamura,
; Sheard,
). Not only are
horizontal ties socially and historically embedded, personnel exchanges and
memberships on the
“presidents’ council” act as further reinforcement. This
combination of debt, equity, and personnel ties, result in a highly intertwined
network of stable financial stakeholders.
There has been considerable discussion of the advantages of horizontal keiretsu
affiliation. Table
summarizes research which has identified one or several of these
benefits. Most discussions have focused on the following interrelated benefits: (1)
access to stable financing; (2) insulation from market pressures; (3) risk reduction;
(4) monitoring benefits and reduction of information asymmetries; and (5) mutual
assistance.
Reciprocal shareholdings supply stable equity financing, while close relationships
with banks and other lenders provide the firm with ready access to debt (Frankel,
; Nakatani,
; Sheard,
). Overall, debt and equity ties afford a
significant internal capital market to member firms.
This stable financial network insulates the firm from market pressures for
short-term performance (Nakatani,
; Prowse,
; Sheard,
); which in
turn is augmented by Japanese corporate governance practices that make it very
difficult for
“outside” shareholders to impact corporate governance (Sheard,
). Thus, studies show that investment of keiretsu firms tends to be insensitive
to cash flow (Aoki,
; Hoshi, Kashyap, & Scharfstein,
; Nakatani,
).
Table 1 Benefits and costs of horizontal keiretsu affiliation.
References
Benefits of affiliation
Risk reduction and performance leveling
Aoki (
,
); Douthett, Jung, and Kwak (
Frankel (
); Gedajlovic and Shapiro (
); Hoshi et
al. (
); Hoshi (
); Kang and Shivdasani
,
); Khanna and Yafeh (
); Kim et al. (
);
Kim and Limpaphayom (
); Lincoln and Gerlach
); Lincoln et al. (
); Matsuura et al. (
);
Morck and Nakamura (
); Prowse
); Roe et al. (
)
Reciprocal monitoring
Reduction of information asymmetry
Mutual assistance
Access to stable financing
Insulation from market pressures
Costs of affiliation
Higher borrowing costs
Aoki (
); Dewenter, Novaes, and Pettway (
Bernotas (
); Hoshi and Kashyap (
); Hoshi
); Inoue (
); Lincoln et al.
); Lins and Servaes (
); McGuire and Dow (
); Miyajima and Kuroki (
); Morck, Nakamura,
and Shivdasani (
); Nakatani (
); Weinstein and
Yafeh (
Over-investment
Poor performance
Heightened information asymmetry
(between firm insiders and outsiders)
Japanese keiretsu: Past, present, future
335
The closely connected set of financial stakeholders characterizing the
horizontal keiretsu fosters reciprocal monitoring which reduces risk for creditors,
network shareholders, and transaction partners (Hoshi, Kashyap, & Scharfstein,
; Hoshi et al.,
; Khanna & Yafeh,
; Kim & Limpaphayom,
;
Morck & Nakamura,
; Roe, Ramseyer, & Romano,
; Sheard,
,
Mutual shareholdings and memberships on president
’s councils encourage mutual
assistance and reduce information asymmetry among horizontal keiretsu stake-
holders. Indeed, such informational transparency may be central to the group
’s
ability to exploit keiretsu advantages when needed. As a result, both transaction
and agency costs are diminished (Gedajlovic & Shapiro,
; Hoshi,
;
Lincoln & Gerlach,
; Lincoln, Gerlach, & Ahmadjian,
; Matsuura, Pollitt,
Takada, & Tanaka,
; Sheard,
). There is also evidence for the
corporate governance role of main banks in terms of the performance sensitivity
of executive turnover (Kang & Shivdasani,
) as well as replacement of
outside directors following significant performance decline (Kang & Shivdasani,
).
In view of these benefits, studies finding lower growth and poorer financial
performance among keiretsu firms may appear puzzling (Isobe, Makino, &
Goerzen,
; Lincoln et al.,
; McGuire & Dow,
; Nakatani,
However, this overall lower performance hides an important dynamic, that of
performance
“leveling” through mutual assistance. Specifically, stronger
performing keiretsu members support and assist weaker members (Gedajlovic &
Shapiro,
; Hoshi et al.,
; Kim, Hoskisson, & Wan,
; Lincoln &
Gerlach,
; Lincoln et al.,
). Personnel transfers and membership on
president
’s councils represent potentially important sources of non-financial
assistance.
While the apparent absence of performance benefits can be explained by
lower risk as well as income-smoothing activities as noted above, a number
of researchers have begun to question the efficacy of certain characteristics
and mechanisms commonly thought to sustain the benefits of keiretsu
membership. Such costs could also be responsible for the poorer performance
of keiretsu firms. Research examining the costs of horizontal affiliation is
summarized in Table
.
Although earlier evidence pointed to a lower cost of capital among keiretsu
firms congruent with more efficient insider monitoring and reduced information
asymmetry within the keiretsu leading to lower agency and transaction costs;
more recent studies find the cost of the bank-centered financing to be substantial.
Reliance on main bank financing accentuates information asymmetry between
keiretsu firms and outside investors which places banks in a strong position to
extract excessive rents. Weinstein and Yafeh (
) report that main bank firms
pay a premium in terms of over-borrowing and exhibit a higher cost of capital.
While not explicitly focusing on keiretsu firms, Morck, Nakamura, and
Shivdasani (
) find bank lending to be associated with higher debt costs.
While one argument is that these premiums reflect compensation for bank
monitoring, several authors have challenged the extent of actual monitoring
undertaken by banks (Beck & Levine,
; Yafeh & Yosha,
). Indeed, there
is evidence that reliance on bank financing may be associated with pressures
336
J. McGuire, S. Dow
toward overinvestment in order to draw on financing from the main bank (Wu
& Xu,
) leading to lower financial performance (Bernotas,
; Inoue,
; Miyajima & Kuroki,
). One explanation for these findings is that
banks act first as
“creditors,” rather than shareholders, emphasizing low risk
strategies and asset protection, and encouraging borrowing (Bernotas,
;
Morck & Yeung,
; Suto & Toshino,
). This more limited financial
network may represent an under-recognized source of risk (Isobe et al.,
While insulation from market pressures may have allowed keiretsu firms access to
stable financing, it has also reduced incentives for efficiency and responsiveness to
financial stakeholders. Although it might be expected that information asymmetries
place keiretsu members at a disadvantage in attracting outside investment, evidence
is mixed. Dewenter, Novaes, and Pettway (
) and McGuire and Dow (
support this argument, while Douthett, Jung, and Kwak (
) find analyst estimates
to be more accurate and less dispersed for keiretsu firms. These authors also find the
effect of keiretsu membership and influence on market equity values is diminished
during the post 1990 market downturn. Lins and Servaes (
) examine the
diversification discount for Japanese firms and conclude that the discount is far
deeper for keiretsu firms as compared to independent firms.
Firms more weakly aligned with the keiretsu are supported at the expense of
stronger firms in order to allow groups to fine tune and support members
’
performance (Gedajlovic & Shapiro,
; Lincoln et al.,
; Lincoln et al.,
). More recently, Kim et al. (
) show that the performance implications of
keiretsu membership differ between more and less powerful firms. Specifically,
they find evidence of pressures on weaker keiretsu firms to improve their
profitability while more powerful keiretsu firms tend toward growth strategies.
However, Isobe et al. (
) propose that the transactional bias toward keiretsu
members imposes coordination/monitoring costs.
Vertical keiretsu
There has been significantly less research on vertically linked firms. Vertical groups
emerged during the 1950
’s as a means by which Japanese firms could expand their
production in the context of scarce financing (Edwards & Samimi,
). Their
membership is less diversified than that of horizontal groupings. Further, the control
structure of the vertical keiretsu is clear, with the
“core” manufacturing firm and its
key suppliers at the center of the network. In contrast to the reciprocal holdings in
horizontal keiretsu, shareholdings in vertical groupings are asymmetric, with
suppliers holding small (if any) positions in primary firms. Nevertheless, equity
ties between the core firm and affiliates are still substantial: Tabeta and Rahman
(
) report that the average ownership position of an automaker in an affiliated
supplier is 32.8%, nearly three times greater than the average holdings in
independent suppliers (11.4%). These differences suggest that the motivations for
equity holdings in affiliated and non-affiliated suppliers may differ, with larger
stakes in affiliated suppliers suggestive of stronger control motivations. The
pyramidal nature of shareholdings (in which the core manufacturer and lead
suppliers hold ownership positions in secondary suppliers) further binds group
Japanese keiretsu: Past, present, future
337
members. Indeed Tabeta (
) suggests that the dominance of group holdings
severely reduces outside shareholdings.
Inter-corporate holdings in vertical keiretsu cement and facilitate product
–market
transactions, and have a
“control” orientation. (Lincoln et al.,
; Tabeta &
Rahman,
). The core firm exerts
“direct and unilateral” oversight, with the
extent of control being linked to their transactional and equity ties to member firms
(Yoshikawa & Phan,
). Congruent with this reasoning, Ahmadjian (
) finds
that automotive manufacturers hold greater equity of suppliers who dedicated to
them a large portion of their production and those whose supplies are more critical to
the firm (for example, in terms of quantity or difficulty of manufacture). They also
serve as
“credible commitments” to a long-term contract (Williamson,
) that
encourage suppliers to work toward higher quality or low costs. Several potential
benefits of vertical groupings have been identified. Research identifying these
benefits is summarized in Table
Relational capital and close ties with suppliers may lower transaction costs,
encourage coordination and communication, and engender a long-term perspective
which limits opportunism (Dyer,
; Dyer & Singh,
; Gerlach,
;
Matsuura et al.,
; Tabeta & Rahman,
Vertical group membership provides suppliers with a stable market for their
products and the possibility of technical, managerial or financial assistance from core
firms. Close contact with their customers may encourage innovation (Suzuki,
Vertical keiretsu can be seen as a
“mid-range” between arm’s length market
transactions and internalized transactions (Ahmadjian & Lincoln,
) which may
allow both core firms and suppliers to benefit from the advantages of both models.
Moreover, findings of greater export performance among vertically linked firms
suggest that they may be able to make use of their stable supplier network for
international expansion (Banerji & Sambharya,
; Chowdhury & Geringer,
;
Lawrence & Saxonhouse,
). Tabeta (
) finds that equity links between
Table 2 Benefits and costs of vertical keiretsu affiliation.
References
Benefits of affiliation
Oversight by core firm
Banerji and Sambharya (
); Chowdhury and
Geringer (
); Dyer and Singh (
);
Edwards and Samimi (
); Gerlach (
); Kang and
Shivdasani (
); Lawrence and Saxonhouse (
Lincoln et al. (
); Matsuura et al. (
); Miyajima
and Kuroki (
); Shanley and Peteraf (
Suzuki (
); Tabeta (
); Tabeta and Rahman (
);
Yoshikawa and Phan (
Encourages co-ordination
Long-term perspective
Reduces governance problems
Stable output market domestically
and export markets encouraged
Lower transaction costs
Technical, managerial and
financial assistance
Foster innovation
Lower costs
Better performance
Costs of affiliation
Limited scope of customers
Ahmadjian and Lincoln (
); Lincoln and
Gerlach (
)
Limited innovation
Tunneling
338
J. McGuire, S. Dow
buyers and suppliers in the Japanese automotive industry are related to cost savings.
Consistent with Kang and Shivdasani (
) and Miyajima and Kuroki (
) who
argue that the strong control orientation of vertical keiretsu reduces corporate
governance problems, there is some evidence for the positive performance effects of
vertical affiliation (Miyajima & Kuroki,
As with horizontal keiretsu, vertical keiretsu exhibit their own set of disadvantages.
These are also summarized in Table
. Some authors suggest that vertical keiretsu
firms face limited scope in terms of customer base and perhaps more limited
innovation driven by the needs of the core firm (Peng, Lee, & Tan,
).
Particularly in the context of Japan
’s recent economic decline, critics have suggested
that vertical groupings benefit core firms at the expense of more peripheral ones. This
behavior would indicate that tunneling of profits occurs within the vertical keiretsu.
Indeed Lincoln and Gerlach (
: 29
–30) wonder “whether such networks generate
genuine efficiencies or whether the advantages they afford to parent firms such as
Matsushita or Toyota come at the expense of the profits, growth rates, and wages of
suppliers.
” Ahmadjian and Lincoln (
) question the continued benefits of vertical
groupings for the core firm, suggesting that the mid-level of integration provided by
vertical keiretsu may become less valuable as firms seek either the flexibility of arms-
length transactions or attempt to internalize core activities and competencies.
Our discussion of both vertical and horizontal keiretsu indicates that both forms of
keiretsu exhibit a
“group value maximization” orientation in which the interests of
group members take precedence over that of outsiders and perhaps even individual
group members. While the dynamics differ between the two groups, evidence
suggests that the benefits of keiretsu membership are not evenly distributed within
the group. Thus, attempts to identify a
“group effect” may oversimplify the nature of
keiretsu membership.
The evolution of keiretsu ties
There has been increasing speculation regarding the future of both vertical and
horizontal groupings in the context of the economic crisis and regulatory change
throughout the nineties and into the 21st century. Recent work suggests that the
Japanese economy began under-performing in 1992 (Hoshi & Kashyap,
). In
terms of the credit crunch precipitated by the declining economy coupled with
intensified regulatory pressure, 1997 has been identified as a pivotal year (Woo,
). These changes have had significant implications for both vertical and
horizontal keiretsu affecting traditional ties among group members. In Table
we
provide an overview of papers which examine traditional keiretsu ties as well as
recent studies which show how these ties have evolved.
Decline in the role of bank financing
Numerous studies document a significant decline in the role of bank financing and
increased reliance on non-bank financing (Ahmadjian & Robbins,
; Gedajlovic,
Yoshikawa, & Hashimoto,
; Miyajima,
; Sadao,
; Suto & Toshino,
; Yoshikawa & Phan,
; Yoshikawa & Phan,
; Yoshikawa, Phan, &
Japanese keiretsu: Past, present, future
339
David,
; Yoshikawa, Rasheed, Datta, & Rosenstein,
). These changes in
part resulted from regulatory reform which increased access to non-bank financing.
However, the increased relevance of the high costs incurred for bank support further
fuelled the dissolution of banking ties. Financial pressures on Japanese banks may
have hampered their ability to work with troubled firms. Particularly noteworthy is
that reductions in bank lending were more pronounced in export sectors and those in
which high growth and flexibility were critical (Inoue,
; Morck & Yeung,
), and among financially strong firms, even those with strong main-bank
relationships (Arikawa & Miyajima,
; Suto & Toshino,
). In contrast, Woo
) finds that group affiliated banks pursued a more aggressive lending strategy
than independent banks regardless of regulatory and economic change.
Changes in ownership structure
Several studies have examined the evolution of Japanese ownership structure. There
has been a significant increase in
“arm’s-length” foreign and domestic investment,
and a considerable overall growth in foreign investment. A substantial body of
research suggests that these changes in equity ownership are associated with
pressures toward a more
“shareholder value maximization” orientation (Inoue,
;
Miyajima & Kuroki,
). Such pressures may jeopardize the mutual support
offered keiretsu members. Further, there has been dissolution of stable, reciprocal
Table 3 Characteristics of keiretsu ties.
Traditional keiretsu ties
Evolution of keiretsu ties
Type of tie
References
Type of tie
References
Bank ties and
reciprocal
shareholding
Berglof and Perotti (
Gerlach (
); Hwang
and Kim (
); Johnston
and McAlevey (
Kaplan and Minton (
Morck and Nakamura (
);
Prowse (
); Sheard
(
Tabeta and Rahman (
)
Diminished
bank debt
Arikawa and Miyajima (
);
Inoue (
); Isobe et al. (
);
Lincoln and Gerlach (
Miyajima and Kuroki (
Miyajima (
); Morck and
Yeung (
); Suto and Toshino
(
); Weinstein and Yafeh
(
Reduced
cross-holding
Inoue (
); Lincoln and
Gerlach (
); McGuire and
Dow (
); Miyajima and
Kuroki (
); Miyajima
(
); Tabeta and Rahman
(
Buyer
–supplier
ties
Ahmadjian (
); Lincoln
et al. (
); Tabeta and
Rahman (
); Williamson
); Yoshikawa and
Phan (
Reduced
buyer
–supplier
ties (vertical
keiretsu)
Ahmadjian and Lincoln (
);
Ahmadjian (
); Lincoln
and Gerlach (
Miyajima and Yafeh (
)
Board and
personnel
exchanges
Berglof and Perotti (
Hwang and Kim (
Kaplan and Minton (
Lincoln et al. (
); Morck
and Nakamura (
Sheard (
Diminished
exchanges of
board and
personnel
Lincoln and Gerlach
); Miwa and
Ramseyer (
);
Seki (
)
340
J. McGuire, S. Dow
shareholdings characteristic of keiretsu ownership structure, particularly horizontal
keiretsu (Miyajima & Kuroki,
). At the same time, the dissolution of ties has not
been uniform across all firms, with profitable firms more likely to unwind than
distressed firms (Inoue,
; Lincoln & Gerlach,
). Some evidence suggests
that equity holdings among group-affiliated firms has shown greater stability than
those of independent firms (McGuire & Dow,
) while others, (Ahmadjian &
Lincoln,
; Ahmadjian,
; Lincoln & Gerlach,
), document an evolution
toward
“North American” ownership patterns among keiretsu firms.
Change in product
–market relationships
There has been growing recognition that traditional buyer
–supplier ties which have
bound keiretsu firms, particularly vertical firms, have been dissipating (Ahmadjian &
Lincoln,
). Ready access to reliable, quality suppliers has diminished the
advantages of vertical linkages. In addition, the increasing importance of
technological skill may have encouraged firms to internalize important functions
(Miwa & Ramseyer,
Changes in informal ties
While most research has focused on financial ties, the personnel ties which
characterize vertical and horizontal groupings have also changed. Given that these
personnel ties often reflect (and reinforce) financial ties, exchanges of board and
other personnel ties with banks and equity partners has evolved (DiMaggio &
Powell,
) propose a progression toward more
instrumental, bi-lateral relationships.
Regulatory reform encouraging a
“North American style” board structure
must also be considered in assessing the role and importance of informal ties.
Prior to board reform in 2002, Japanese boards were dominated by insiders
appointed from among long-standing and well-regarded employees. The 2002
amendment to the Company Code allowed firms the option of adopting a
committee system that is based on a board of directors and three committees
(nominating, audit, and compensation) similar to that used in the US. These
committees are supposed to include outside directors, thus providing a further
separation between monitoring and execution functions. Although only a small
number of firms have officially adopted this system, Seki (
) reports the
growing role of outside board members and a reduction in board size. While
previously the size of the board of directors often exceeded twenty members, by
2004 the average board size was 10.5 members, with 35% of his sample of 523
firms having at least one outside board member. Among those firms appointing at
least one outside board member, firms had an average of nearly two outside board
members. However, Miyajima (
) observes that the addition of outside board
members has proceeded without regard to strengthening their independence.
Nonetheless, changes in board characteristics is of potential significance
—on the
one hand boards are moving toward US style practices while on the other hand
additions of outside directors may provide additional inter-firm linkages which
reach beyond traditional keiretsu boundaries.
Japanese keiretsu: Past, present, future
341
The continued role of keiretsu in the Japanese economy
As a result of shifting economic and regulatory pressures, there has been
considerable speculation regarding the future of business groups in Japan. The
following section discusses the continued role of Japanese keiretsu from several
theoretical perspectives.
A transaction cost-agency theory perspective highlights the role of both types of
keiretsu in reducing agency and transaction costs in terms of monitoring, mutual
dependence, commitment, and norms of mutual forbearance and assistance. Our
earlier discussion, however, suggested that keiretsu may have become increasingly
costly forms of
“insurance” against risk and agency/transaction costs.
This would be particularly the case in the context of the continued globalization
of product and financial markets. The literature reviewed earlier points to demands
from global financial stakeholders as a factor in weakening group ties. As pressures
mount for more
“North American” performance outcomes, members of vertical and
horizontal keiretsu may find it difficult to maintain their traditional ties in the face of
lower-cost arm
’s length alternatives.
Resource dependence arguments also support a weakening of keiretsu ties.
The growth of new financial stakeholders (for example, foreign investment and
non-bank financing) has significantly reduced dependence on traditional sources
of financing. New entrants in product markets have allowed vertical keiretsu
members (both core firms and suppliers) to expand beyond their traditional bases.
Research findings have documented the influence of new financial stakeholders
on the strategic and financial objectives of the firm. If keiretsu firms maintain
their traditional
“group-centered” orientation, they may become increasingly
disconnected from the financial and strategic environment faced by member
firms.
Several authors have applied institutional theory to the evolution of keiretsu
organization. Institutional theory holds that pressures for
“legitimacy” propel firms
to maintain structures, processes, and procedures although they may depart from
what would otherwise be dictated by economic rationality (Yoshikawa, Tsui-Auch,
& McGuire,
). Without question, institutional forces have traditionally
supported both forms of keiretsu. Vertical and horizontal keiretsu are deeply
embedded in the Japanese institutional context (Hoshi & Kashyap,
; Hoshi,
; Lincoln and Gerlach,
; Morck and Yeung,
), and indeed are
congruent with broader Japanese cultural values toward cooperation and collectiv-
ism. However, there has been considerable debate regarding the extent to which
recent economic changes and the evolution of the Japanese and global economies
resulted in weakened institutional pressures toward the persistence of keiretsu
organization.
Lincoln and Gerlach (
) argue for institutional pressures toward persistence,
while Yoshikawa et al. (
) propose that pressures from the global economy and
changing regulatory pressures may have significantly altered institutional pressures
toward change. Building upon Oliver (
), these authors argue that functional,
social, and political pressures toward deinstitutionalization may have significantly
lessened institutional support for keiretsu organization. Further, Oliver (
) notes
that firms can adopt various strategies to respond to institutional pressures which
342
J. McGuire, S. Dow
allow them to maintain key components of the existing system. Particularly given
the multi-faceted nature of keiretsu membership, weakening one form of tie may
be offset by strengthening of others. That the most obvious
“alternative model,”
the North American model of firm independence and
“arm’s length” ties among
financial stakeholders and transactional partners, has been challenged by
corporate governance scandals and poor performance in several industrial
sectors (e.g., the automotive and technology sectors) in which Japanese firms
have out-performed US firms, may have further weakened pressures toward
institutional change.
The effect of economic context must also be considered. Two alternative
perspectives can be proposed. Japanese keiretsu emerged in a specific economic
and institutional context where firms faced specific financial and product
–market
challenges. Lincoln and Gerlach (
) suggest that keiretsu ties exhibit counter-
cyclical tendencies, strengthening during weak economic periods, dissipating in
strong economic periods. In essence, heightened monitoring by stable financial
stakeholders is particularly valuable during periods of economic decline. If this is
the case, we would expect keiretsu to play an increasingly important role in the
Japanese economy.
Another perspective, however, holds that the keiretsu structure which fuelled
Japan
’s post-war growth may be inappropriate and costly in the current context
(Lincoln & Gerlach,
). These authors argue that access to a stable pool of
capital, supplier and distribution networks, and stable interconnected corporate
elite are instrumental in promoting economic growth and development. However,
they may be counter-productive when efficiency, innovation, and market
responsiveness become critical. In fact, Hoshi and Kashyap (
) and Hoshi
(
) conclude that horizontal keiretsu contributed to the under-performance of
the Japanese economy beginning in 1992 and further that propping up weaker
keiretsu members, their so-called
“zombie” firms, perverted efficient resource
allocation in Japan.
Empirical evidence for the continued strength and role of keiretsu is mixed.
Yoshikawa et al. (
) find evidence of weaker market pressures among keiretsu
firms compared to independent firms. This evidence suggests that although
keiretsu firms may not be completely insulated from outside pressures, they may
be slower to change than independent firms. As previously discussed, Miyajima
and Kuroki (
) document that profitable firms were more likely to unwind
cross-shareholdings than were distressed firms. Other studies (Inoue,
;
Lincoln & Gerlach,
; McGuire & Dow,
) also find declining affiliation
during the prolonged economic downturn of the nineties. Lincoln and Gerlach
(
) provide evidence showing ties among both types of groupings
strengthened during recessionary times. Their results also suggest differences
in the evolution of various forms of ties, with some strengthening and others
weakening.
Reconciling these findings, it may be that the logic of group ties evolved
from the more
“macro” oriented network support to more instrumental dyadic
ties (Granovetter,
). This argument is congruent with that of Oliver (
who notes that firms have strategic choice in their response to institutional
pressures. The Lincoln and Gerlach (
) results suggest an additional means of
Japanese keiretsu: Past, present, future
343
responding to pressures toward change through modification of the logic and
form of network linkages while maintaining many of their more visible
characteristics. This trend, however, may not imply that potentially weaker
dyadic ties are less important. Rather, traditional keiretsu ties may evolve to
serve as a support or monitoring role for dyadic exchanges. Thus, consistent with
Granovetter
’s argument (Gedajlovic et al.,
; Morck & Yeung,
; Suto &
Toshino,
), weak ties may provide the
“network infrastructure” which allows
for the smooth functioning of dyadic ties. The complexity of keiretsu ties
represents an important challenge to researchers.
We began this review by noting that keiretsu are characterized by permeable and
evolving boundaries, differing degrees of inclusion, and multi-dimensional ties.
Almost by necessity, empirical researchers are forced to focus on a limited number
of measurable ties. Therefore, evidence of weakening of one type of tie may not
indicate weakening of the group. Rather, it may suggest that other forms of ties have
become more appropriate or valuable. That Lincoln and Gerlach (
) found
differences in the evolution of equity, lending, and personnel ties supports this
argument. One illustration of this phenomenon can be found in the potential for a
changed role for the board of directors. As the role of outside board members
increases, they may become an increasingly important form of inter-firm tie. Indeed,
Aoki (2004) provides evidence that increased outside representation on the boards of
members of vertical keiretsu can be viewed as a means by which core members
reinforce their control over their transaction partners.
There have been relatively few studies comparing the evolution of vertical and
horizontal groupings. While Lincoln and Gerlach (
) find counter-cyclical
tendencies in both types of groupings, McGuire, Dow, and Yoshikawa (
) find
ties among horizontal groups to be more stable. Given that differing logics underpin
the two forms of groups, their evolution in the context of regulatory and economic
change may differ. While Japan
’s economic downturn may have weakened the
ability of group members to support weaker firms it could also have strengthened the
resolve of stronger keiretsu firms and main banks to help out distressed members.
Further, the central role of banks in horizontal groups may imply more limited access
to lower-cost arm
’s length financing. Bank investment objectives reflect their role as
creditors, rather than shareholders, favoring low risk strategies and investment in
capital-intensive (and tangible) assets (Inoue,
; Miyajima & Kuroki,
Morck and Yeung (
) argue that such pressures are incongruent with the
demands of the current Japanese economic and competitive climate. Such
opportunistic behavior may further erode group benefits.
Empirical evidence suggests that during the prolonged Japanese downturn
banks sold off high performing (and easily liquidated) investments and
maintained their (sometimes under-performing) group holdings (Seki,
It is likely that these shares were acquired by arms-length domestic and foreign
investors (Gedajlovic et al.,
) whose performance expectations may deepen
the performance differences between horizontally linked and independent firms.
Finally, although there is evidence that corporate shareholdings imply perfor-
mance pressures (Lincoln & Gerlach,
), this trend may not hold for
horizontally affiliated firms, whose corporate holdings may not reflect investment
objectives.
344
J. McGuire, S. Dow
In contrast, vertical firms are less affected by the conservative bias of bank
shareholdings and pressures to maintain bank shareholdings. Further, the
economic logic and benefits of vertical affiliation may be more clearly visible
(Tabeta,
). Group holdings may limit non-affiliated investment and
performance pressures (Friedman, Johnson, & Mitton,
). Shanley and
Peteraf (
) argue that the benefits of vertical networks are particularly
important in the context of complex products and where networks provide a
mechanism for flexible and low cost coordination. As such, they may be
particularly useful in key industrial sectors. Alternatively, the costs of vertical
affiliation may also be more readily visible than the more
“intangible” benefits of
horizontal affiliation. The instrumental nature of vertical shareholdings suggests
that core firms may have limited incentive to support inefficient suppliers.
McGuire et al. (
) find evidence of weakening of vertical linkages during
Japan
’s economic decline.
Keiretsu membership: Instrumental or ceremonial
Miwa and Ramseyer (
) are highly critical of research on the keiretsu effect.
They review the standard references for categorization of the keiretsu
—Research
on the Keiretsu (ROK; Keiretsu no kenkyu) in Japanese and Dodwell
’s Industrial
Groupings in Japan
—and dismiss both as sources of the “keiretsu fable.” Our
literature review would be incomplete if we did not acknowledge the problems
associated with classifying firms as keiretsu members. The Dodwell reference
ascribes different degrees of keiretsu affiliation depending not only on the degree
of debt/equity ties but also according to more informal indicators, chief of which is
membership on the President
’s Council. Miwa and Ramseyer (
), however,
contend that the president
’s council is merely a “lunch club” conveying no special
additional levels of commitment to the group. They argue that the reason for so
many conflicting results regarding keiretsu impact is due to the heterogeneous/
haphazard classification employed.
An in-depth discussion of the Miwa and Ramseyer (
) perspective is beyond
the scope of this paper. However, it raises an important issue for future research on
keiretsu and on Japanese industrial organization. Our previous discussion has
emphasized the permeable and changing nature of keiretsu boundaries, and the
multiplex nature of keiretsu ties. Reliance on a limited range of definitions of
keiretsu membership and types of keiretsu ties may have limited our understanding
of more subtle forms of keiretsu ties. Most recent work on business groups in
general, and keiretsu in Japan have found that the response of firms to changes in
economic conditions is accentuated at various points in the business cycle. Kang and
Shivdasani (
), for example, explicitly investigate propping versus tunneling in
business groups in order to gauge response during periods of economic shock. Other
work cited earlier, (for example, Helms,
), directly investigates how business
groups responded in Japan when firms faced financial distress. Hoshi (
similarly analyzes the business group response to distressed firms. Therefore,
conflicting results regarding the impact of the keiretsu could equally be due to
samples having been drawn at different points in time and not due to a non-existent
Japanese keiretsu: Past, present, future
345
distinction among keiretsu and non-keiretsu firms in Japan as Miwa and Ramseyer
(
) assert.
Future research directions
We would like to suggest three
“themes” for directions for future research: a
broadening of theoretical perspectives, recognition of the complexity of keiretsu ties
and their function, and the contribution of keiretsu research to our understanding of
economic growth and the role of business groups in other contexts.
First, there has been a growing recognition that economic rationality and
efficiency may be insufficient to understand the role of keiretsu in the Japanese
economy. If, indeed, many aspects of Japanese keiretsu do not correspond to pure
economic rationality, other theoretical perspectives can complement the traditional
economic logic used by researchers. For example, we have noted the importance of
institutional theory and path-dependence in understanding the Japanese context. That
keiretsu membership has been viewed as a form of
“insurance” in case of future need
suggests the relevance of options theory. The changing nature of keiretsu ties may
further suggest the potential contribution of network theory to understanding the
changing structure and function of keiretsu.
Building upon this argument and the multiplex nature of keiretsu ties, it is likely
overly simplistic to assume homogeneity in the purpose and evolution of different
types of keiretsu ties. Certain ties (for example, lending ties) may reflect economic
rationalities, while others (e.g., personnel ties) may be best explained by institutional
or path-dependence arguments. Changes in the regulatory and economic environ-
ment may imply changes in keiretsu ties, the possible change in the role of the board
of directors being one example. We noted earlier that research has tended to make
use of a limited scope of definitions of keiretsu membership and types of keiretsu
ties. Other forms of links can also be examined, for example formal cooperative
ventures and research consortia.
Our earlier discussion touched on the role of keiretsu in fueling Japan
’s post-war
economic development. While keiretsu may have fueled Japan
’s earlier economic
development, this may no longer be the case. Indeed, Mayer, Schoors, and Yafeh
(
) note the challenge faced by Japanese entrepreneurs in attracting capital as a
limit to Japanese economic growth. The relatively small number of Japanese venture
capitalists, many of whom are funded by banks, may further constrain entrepre-
neurial activity in Japan. For example, Chakrabarti, Singh, and Mahmood (
Chang and Hong (
), Chang and Hong (
), and Khanna and Yafeh (
conclude that Japanese venture capitalists tended to favor investment in affiliated
firms. Although a potential
“group incubator” effect may explain the prevalence of
later-stage venture capital investment, such investment priorities place smaller,
independent entrepreneurs at a disadvantage.
Understanding the role of keiretsu in the Japanese economy is only part of the
reason for the importance of research. Industrial groupings are a dominant economic
force in many developed and developing economies. Research has come to no clear
consensus regarding the role of business groups in different settings (Chang & Hong,
; Chang & Hong,
; Khanna & Palepu,
,
; Khanna & Rivkin,
346
J. McGuire, S. Dow
and evidence suggests caution in generalizing Japanese findings to other contexts.
This issue is particularly critical in the context of development, where two
alternative dynamics have been proposed. To the extent that business groups may
substitute for a well-functioning capital market, they have been viewed as critical to
the development of emerging markets (Aggarwal et al.,
; La Porta, Lopez de
Silanes, & Shleifer,
; Thakor,
). Alternatively, dominance of business
groups reduces pressures toward transparency and disclosure and places outside
investors at a disadvantage which other evidence suggests is critical to emerging
markets (Aoki,
Finally, the recent cross-keiretsu mergers which have occurred between both
vertical and horizontal keiretsu raise important research issues. The formation of
Mizuho (through the merger of Fuji, DKB and the Industrial Bank of Japan),
Mitsui Sumitomo and Mitsubishi UFJ (Sanwa and others) has important
implications for these horizontal groups, as well as their associated vertical
keiretsu. At the most fundamental level, these mergers may imply a major shift in
the identity and perhaps function of these groups. Indeed, they may even signal the
potential dissolution of the traditional keiretsu system. Alternatively, they might be
viewed as an adjustment to better align traditional Japanese industrial organization
in the changing realities of the 21st century. For example, more arm
’s length or
weak ties among members of a larger group might prove more useful in the current
context in allowing them to better recover from their prior difficulties. Adaptation
to changing circumstances may imply strategies other than the mutual support
offered by traditional keiretsu ties.
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350
J. McGuire, S. Dow
Jean McGuire (PhD, Cornell University) is the William Rucks IV Professor of Management at the E. J.
Ourso College of Business, Louisiana State University. Her research interests are corporate governance,
including executive compensation, transparency and disclosure, and patterns of ownership. Her research
has appeared or is forthcoming in such journals as the Academy of Management Journal, Organization
Science, Journal of International Business Studies, Journal of Management, and Asia Pacific Journal of
Management. This is Professor McGuire
’s 3rd contribution to APJM.
Sandra Dow (PhD, Concordia University) is an Associate Professor of Finance at the Université du
Québec à Montréal. Her research interests are in the areas of corporate governance and corporate finance
including ownership structure, business groups, dividend policy, and the role of national business systems
in influencing corporate governance outcomes. Her research has appeared or is forthcoming in such
journals as Asia Pacific Journal of Management, Journal of Business Research, Journal of International
Business Studies and International Finance Review. This is Professor Dow
’s 2nd contribution to APJM.
Japanese keiretsu: Past, present, future
351
Document Outline
- Japanese keiretsu: Past, present, future
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