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Copyright © 1997 by the American Chemical Society.
The patterns of trade and investment in Asia are complex and overlapping. Numerous studies have been conducted on the role of Japan's foreign direct investment (FDI), trade, and foreign aid as contributors to regional economic growth and integration. Recently, more attention has been given to Japanese corporate activities in Asia. According to several studies, Japanese investments are promoting intra-industry trade and vertical integration in Asia, particularly in the manufacturing sector. Japanese firms have integrated their Asian affiliates on a regional scale and invested in complementary production or assembly operations in different countries, and many have established their regional headquarters in Singapore.
Japanese firms' global production and trading activities are supported by networks of suppliers in Asia (1, 2). These networks, especially in the electronics and auto industries, often are intended to serve the regional markets as well as export bases and "are hierarchically organized, with much of the decision-making authority, technological capabilities, and sourcing remaining in Tokyo" (3).
A central question about the movement of Japan's production networks offshore is whether the organizational structures and practices of Japanese corporate groupings (keiretsu) exist in those Asian markets with extensive Japanese investments. If so, what are the likely economic implications, particularly regarding market access? And what are the implications for U.S.-Japan relations?
Whereas previous research has focused largely on upstream relationships (between manufacturer and supplier), it is possible that the keiretsu, integrated across borders and operating in downstream distribution channels, could become exclusive or closed to non-keiretsu companies. From an international trade policy perspective, such exclusion would constitute a "transplanted trade barrier" (TTB). A TTB is a measure, policy, or practice that, when transferred from one economy to another, singularly or in combination with others, may impede imports or market access to outside firms.
Economists, industrial organization and management specialists, antitrust or legal specialists, and international trade analysts hold diverging views about the implications of Japanese corporate organization and operations (including keiretsu) for performance and market access (4). The debate among representatives of these various disciplines centers on whether the interdependent, long-term relationships and practices of keiretsu firms result in efficiencies and welfare enhancement with pro-competitive consequences or inefficiencies, exclusivity, and market closure (5, 6). The tradeoffs, however, are not mutually exclusive; that is, some practices that may enhance efficiency in the short run may still be exclusionary.
With regard to downstream distribution, research has shown that certain business practices associated with keiretsu operations, at least within Japan, may enhance efficiency in terms of providing assured supplies, better customer service, and accurate product information to consumers. However, these same practices (particularly exclusive dealings, territorial restrictions, refusals to deal, and rebates) may also exclude non-keiretsu firms, both foreign and domestic (7, 8). Japanese manufacturers use such practices to control supply and distribution activities and to support their sales and pricing policies. In many industries characterized by keiretsu relations, such actions create an atmosphere in which Japanese manufacturers and purchasers are less likely to switch to new suppliers solely on the basis of price. Vertical and horizontal practices raise the costs and risks of doing business for outsiders.
Keiretsu structure and organization have been the subject of previous trade negotiations between the United States and Japan. During the Structural Impediments Initiative (SII) from 1989 to 1991, U.S. negotiators raised specific aspects of keiretsu buyer-supplier relations and Japanese competition policy. In response, Japan agreed "to make keiretsu relationships more open and transparent" so that they will not hinder fair competition and the entry of foreign firms into the Japanese market (9). Subsequently, short-term or limited changes were made with regard to stricter enforcement of the Antimonopoly Law. However, many of the same issues resurfaced during the Framework talks, which began in 1993, and more recently during the current Kodak-Fuji film dispute.
In general, U.S. negotiators remain concerned about the perceived lack of transparency and potentially exclusive effects of keiretsu relations for non-keiretsu firms in Japan and elsewhere. One major consideration is which, if any, keiretsu business practices are used in Asia and whether similar effects regarding limitations on access to distribution channels or supplier opportunities might be expected. Given the different conditions of competition within industries and legal systems in each country, the impact of such practices would necessarily have to be evaluated on a country-by-country, industry-by-industry basis. To the extent that keiretsu structures and exclusive interfirm transactions are found to be associated with Japanese FDI in Asia, these concerns may be heightened and U.S. policy makers may be pressured by U.S. businesses to respond.
In this article I provide additional insight into several of the topics relating to Japan's role in Asia, mentioned earlier. Most importantly, I describe, from an international trade policy perspective, the potential implications for foreign market access and U.S.-Japan relations of Japanese corporate activities--particularly those associated with keiretsu--in selected Asian economies. Based on statistical information and other evidence, most Japanese affiliates in selected Asian economies appear to be associated with one or more keiretsu. In industries with an extensive keiretsu presence, there may be a lot of intra-keiretsu purchasing. Anecdotal evidence suggests that some exclusive business practices associated with the keiretsu in Japan are being replicated in Asia. Such practices may affect market opportunities and access for non-keiretsu suppliers and distributors.
Second, the parent company for each Japanese affiliate and its related corporate grouping were identified by cross-referencing the JETRO directory with Dodwell's Industrial Groupings in Japan 1994/1995 (20). A broad-based set of criteria was used to match each overseas investor with its affiliated grouping in Japan. If the parent firm of the overseas affiliate was listed as a presidential council member, as having equity ties, or as having personnel ties to one of the groups, it was considered "affiliated" with that group.
As shown in Figure 1, the country with the most affiliates associated with one or more keiretsu (both horizontal and vertical) in Japan, as a proportion of the total sample size, was Indonesia (61%); Thailand (48%) and Malaysia (45%) followed close behind. The horizontal keiretsu with the most affiliated firms in these three countries were DKB (128), Mitsui (116), Sumitomo (109), and Mitsubishi (104). With regard to vertical keiretsu, there were 76 affiliates in Thailand, 66 in Malaysia, and 31 in Indonesia. The vertical keiretsu with the most affiliated firms were Hitachi (26), Toyota (24), Matsushita (19), Toshiba (16), Nippon Steel (14), and Nissan (12) (Table 3).
The keiretsu also were studied by industry. They have invested in 40 industries in Indonesia, 43 in Malaysia, and 49 in Thailand. In the chemical, paints, pigments, and related industries (of those firms surveyed), 16 Japanese affiliates in Thailand, 11 in Indonesia, and 3 in Malaysia had ties to keiretsu. In all of the countries surveyed, Japanese affiliates with ties to keiretsu were involved in producing or distributing both capital and consumer goods (furniture, housewares, cosmetics, and jewelry, for example) and services (banking, insurance, trading, shipping, and freight forwarding). Based on this information, it appears that the keiretsu are involved in many manufacturing, distribution, and transportation activities in these economies.
There is increasing statistical and anecdotal evidence that at least some business practices associated with keiretsu in Japan are used in Asia as well. For example, in some cases Japanese auto firms have demanded lower prices for parts and higher quality standards from their suppliers during economic downturns. The local suppliers, who are locked into providing products according to the Japanese manufacturer's specifications, have no choice but to comply (23).
As in Japan, the parent or dominant firm supplies the capital, technology, managerial expertise, and a market through established distribution networks. The dominant firm can maximize the benefits resulting from quasi-integration and long-term relations and minimize its risks. In exchange, the supplier is expected to produce parts, invest in production equipment, and provide training to employees in accordance with the parent company's criteria. The effect of such relations may be to limit outside suppliers' opportunities.
There are indications that "buy Japanese" preferences, prevalent in Japan, also appear to be favored by Japanese firms in Asia. Japanese auto producers in Asia, for example, continue to purchase high-end parts from Japan or from Japanese affiliates that have followed them offshore. In Singapore, Japanese electronics firms purchase almost 80% of their audio and video components from other Japanese companies located there. Anecdotal evidence suggests that the effects of these practices and close manufacturer-supplier relations in Asia may be exclusionary. For example, U.S. auto producers claim that they already have experienced difficulties in finding local firms willing to supply them in Asia because of ties to Japanese producers.
The characteristics of Japanese in
The "keiretsu-fication" of industries in which Japanese firms have invested extensively--electronics, autos and parts, chemicals, banking, construction, and metals--may affect market opportunities for both domestic and foreign non-keiretsu suppliers and distributors. To the extent that Japanese firms in Asia are duplicating their home-market organizations and practices, there is reason to expect that foreign firms, including U.S. companies, may experience difficulties in entering markets in Asia. This difficulty will arise in purchasing components, becoming keiretsu suppliers, and marketing products to local consumers.
Despite some of the potential problems for foreign firms, there may be several advantages for local economies associated with the replication of Japanese keiretsu in Asia. To the extent that some local firms are brought into the keiretsu and transfers of managerial and technological skills occur, the Asian economies may gain in terms of productivity, quality control, and production management. Consumers could benefit from the introduction of new products and improved service. Localities adjacent to Japanese production facilities and industrial estates have already witnessed infrastructure improvements such as new highways, built by the investing firms.
However, if U.S. firms are excluded from supplier, distributor, or other contracting opportunities as a result of Japanese business relationships in Asia, the United States and other countries may be pressured to negotiate with the host countries. It may not be easy to determine the appropriate negotiating partner, because the distinction between perceived local barriers to trade and investment and transplanted trade barriers is likely to become blurred. The connections between Japanese keiretsu and local economies will make it more difficult to distinguish the actual origins of market access problems, which could be attributed to transplanted keiretsu practices, indigenous practices, or the practices of local firms that have been integrated into the keiretsu. It will therefore be very important that accurate and complete information about any problems that U.S. firms face in Asian markets be relayed to U.S. negotiators in order to minimize misunderstandings and avoid unnecessary trade negotiations.
In general, researchers are divided in their views about whether the keiretsu and production networks are opening to outside firms in Japan and elsewhere. According to one view, keiretsu networks are indeed facing pressures to open up as the costs of maintaining less productive group members increases. In addition, as firms are inclined to enter into more cross-national alliances, ties between keiretsu may weaken (25). However, in the short term, there is less of a chance that keiretsu member ties will ease, because there are not yet enough internal and external pressures to reverse decades of closed purchasing behavior and preferential business relations.
The first step in addressing market access issues associated with keiretsu overseas is to specify the extent and types of business practices underlying their production and distribution networks. Trade groups such as the Asian Pacific Economic Cooperation (APEC), the Organization for Economic Cooperation and Development (OECD), and the World Trade Organization (WTO) may, in the future, be called upon to address issues regarding differences in competition policy, business organization, and economic structures among countries, beginning with joint studies.
In the meantime, there is no reason to expect complete convergence between Japanese and U.S. economic systems. Significant differences are likely to remain. Japan will probably not abandon the keiretsu in the short term, despite current economic or political pressures. Such activities will continue to highlight the conflict between industrial policy and competition law, in Japan and elsewhere.
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