japan's manufacturing system: small business, subcontracting and regional complex formation

Japan’s Manufacturing System: Small Business, Subcontracting and Regional Complex Formation*

AMY GLASMEIER AND NORIUKI SUGIURA

There is growing speculation about the longevity of mass production as the underlying principle of manufacturing organization in advanced industrial economies (Piore and Sabel, 1984; Roobeek, 1987; Lipietz, 1987). Observers point to emerging alternatives as indicative of the pending transition. Discourse describing these developments is based upon empirical studies which document new forms of manufacturing organization in regions and countries primarily outside the USA (Sabel, 1988; Kenny and Florida, 1989). Whether identified as postfordism, flexible specialization or ‘fujitsuism’ , the new paradigm is heralded as indicating the movement away from postwar dependence on mass production towards more customized, flexible and skill-intensive industrial organization.

The Japanese manufacturing system is often cited as an example of the new model of industrial organization. On the surface, Japanese mass production is characterized by the dominance of large firms assisted via far-reaching government intervention. This has led to conjecture in the United States and other countries about the strategic importance of large firms’ ability to cross-subsidize operations, achieve economies of scale, and gain greater shares of individual markets (Johnson, 1982; Zysman and Tyson, 1983). But another side to Japanese production is a network of very elaborate subcontracting relationships, in which the largest firms are often only final assemblers organizing groups of smaller manufacturers.

While the Japanese manufacturing system stands out as an important counterpoint to western-style mass production, we know surprisingly little about its internal functioning. Our understanding rests on assessments of discrete components of the system - the role of the state, large business, small business, subcontracting or the social division of labour. Case studies of Japanese manufacturing (upon which most of existing assertions in the literature are based) examine a limited range of key sectors (automobiles and electronics), and thus experiences are difficult to generalize. Similarly, most analyses of Japanese government emphasize the developmental role of national policies and programmes while ignoring the state’s involvement at very decentralized levels of the political system. Studies of Japanese production have tended to be dichotomies in which some view the Japanese system as superexploitative - relying on low wages, severely regimented working conditions and unchallenged management prerogative (Dohse et al., 1985). Conversely, Kenny and

*This research project and paper were generously funded by the Tissot Economic Foundation of Le Locle, Switzerland. We wish to thank the various people we interviewed, particularly Mr Kato of the Japanese Small and Medium Enterprise Agency of Tokyo. He provided invaluable insights about the internal functioning of Japanese small business and assisted us in completing the small firm case studies. All omissions and errors are the authors’. We also thank Amy Kays for editorial and manuscript production assistance.

396 Amy Glasmeier and Noriuki Sugiura

Florida described the Japanese system, or ‘fujitsuism’, as rational, skill-intensive and governed by power-sharing between management and labour (1989). Few authors explore the pivotal role of Japan’s physical geography and natural resource limitations, which have greatly influenced the organization of the industrial space economy. There are also limited integrated examples of the internal mechanisms of the production system. Thus, in this article we attempt to knit the various elements of the Japanese manufacturing system into an explanation of its current organization.

Japan’s manufacturing success is partly attributable to interwoven production relations which incorporate many small firms into an elaborate web guided by the nation’s largest firms. This involvement has dramatically affected the rate of technological up-take within the system as a whole (Friedman, 1988). Competitive pressures embedded in the subcontracting system force small firms either to adopt state-of-the-art innovation processes or to face the prospect of reorganization or failure. Most signals of the need to add new technology come from large firms which insist that smaller subcontractors use the most advanced equipment available, essentially constructing production mandates which if unmet seem to ensure failure of small subcontractors over the long term.

As arbiter and frequent financier of firm upgrade, government intervention ensures that the system is self-reproducing and constantly undergoing rationalization to produce at high levels of efficiency. But as we will see, organization is not monolithic. During the economic boom years of the early 1980s, the engineer of the postwar Japanese economy (the Ministry for International Trade and Industry, MITI) had to rely upon other institutions to regulate the production system. With the yen revaluation of 1985 (endaka), MITI once again exerts major influence on the direction of the economy.

The first part of this paper introduces and outlines the role of small business in Japanese manufacturing industry. Through a focus on production, it is evident that small business is an essential element of the economy. Representation in manufacturing is high by developed country standards, and small business presence is pervasive throughout other sectors as well. Small business in the service sector is the employer of last resort - a pre-retirement receptacle for workers who have left industry and government. Also, small businesses employ many women and handicapped individuals. Thus, in some very complicated ways, small business forms an informal adjunct to the limited Japanese social welfare system.

The paper continues by examining the role of small business and the Japanese subcontracting system. Through an historical description of Japanese manufacturing, we emphasize how small business and rampant subcontracting came to frame the basis of production organization today. An assessment of the Japanese economic system from the perspective of firm organization reveals a high degree of vertical and horizontal integration among firms. Small businesses are essential to the flexibility and resiliency of the Japanese economy. But they are not autonomous actors. Through stock ownership of affiliates and subsidiaries, Japanese intermarket and independent business groups control the fate of small and medium size firms. Case studies reveal both the tensions and the evolutionary potential of small business manufacturing.

In recounting the role of small business in the nation’s economy, we briefly address some of the important challenges to this sector. Many establishments have low productivity, are under-capitalized, and thus are vulnerable to failure. The Japanese population is rapidly aging, and a vast number of existing small businesses indicate that when their proprietors retire, the firms will close (MITI, 1987).

The state and geography are also critical factors influenckg the organization of manufacturing in Japan. Government exercises enormous influence in the system’s tendency towards persistent rationalization. Unlike other treatments which have focused at the nation- state level, our approach descends the governmental hierarchy and examines various community organizations, banks, business groups and the decentralized arms of government agencies, which penetrate the workings of business and assist in the process of change.

Finally, in examining the Japanese system we assert the importance of geography

Japan’s manufacturing system 397

as a major factor dictating the physical. form of production organization. As will be argued, the structure of manufacturing in Japan is uniquely constrained by natural and physical resources. Thus in detailing the pivotal role played by Tokyo in the Japanese space economy, a picture of dramatic geographic interdependence becomes evident.

Small and medium size business in Japan

The Japanese economy is heavily dependent on small and medium size businesses (SMBs) (Nakamura, 1986). Making up 99% of all business establishments, SMBs account for 80% of employment in Japan (Small Business Investment Co. Ltd, 1989). In manufacturing, 99% of factories are considered small, and these facilities employ 72% of all manufacturing workers (compared with 53 % for the USA) (Small Business Finance Corporation of Japan, 1986; Harris, 1984). Prior to the yen revaluation in 1985, SMBs were increasing in importance in the overall manufacturing economy. But as we will see later, the SMB sector is undergoing considerable restructuring, and many marginal firms are now threatened (Uekusa, 1987).

The Japanese system of vertical disintegration depends on the participation of individuals in the society who work for wages below prevailing rates. Although dramatically increasing from the 1950s, wages earned by workers in small business are still only 75% of those earned by employees of large firms (Friedman, 1988). As mentioned above, small and medium size businesses are importance sources of employment for women and workers of retirement age. Most women in Japan work in family-owned enterprises, often for very low or no wages. This labour is an integral part of the efficiency of small business. Also, as in Hong Kong, Japanese women do a great deal of piecework in the home.

Another source of low wage labour is workers of retirement age. Almost one-third of all workers aged 55-64 work in SMBs. The Japanese social welfare system covers only a portion of the working population, and mandatory retirement at age 60 results in a large number of retired individuals who either must or still want to work to earn a living or augment retirement savings. Upon completion of primary employment (which may or may not provide retirement benefits), these workers often move into family businesses.

Small businesses dominate employment in sectors such as agriculture and fisheries industries, construction, retail and wholesale trade, and services (MITI, 1987; Patrick and Rohlen, 1987; Batzer and Laumer, 1989). As anticipated, small and medium size enterprises generally have low levels of productivity relative to their large counterparts. Employees work with less capital and are paid lower wages. Yet over the last 20 years value-added per employee in these small establishments has increased at about the same rate as that of the larger firms whose top-down pressures necessitated continual upgrading of production technology (Patrick and Rohlen, 1987). Alternatively, anecdotal evidence shows that additional, unrecorded hours of work (beyond the standard working week) may artificially elevate small business productivity measures.

While small businesses remain a vibrant part of the Japanese economy, it is incorrect to assume that they are the engine of economic growth. Nor, however, should they be viewed as a drag. The role of small business in the Japanese Gross National Product is complex. While they rarely engage directly in research and development, small businesses are avid adopters of process technologies. Adaptation of new technology often occurs as small firms struggle to remain competitive in the Japanese system. Thus to understand the importance of small businesses in the Japanese economy, we must now take a closer look at the Japanese manufacturing system.

The fieldwork upon which this article is based is coincident with a period of extreme

I . Small husiness in Japan includes firms with fewer than 100 employees.


upheaval in Japan. Starting in 1985, the yen revaluation placed enormous pressure on the postwar Japanese system of manufacturing. In a period of stability it was possible for a large mass of extremely specialized small firms operating at the margins to exist; but an external shock of the magnitude currently confronting Japan has significant repercussions. The overwhelming majority of small firms are finding it difficult to make the transition (Wantanabe, 1989; Kato, 1989). Process efficiencies dicated by new mandates of large assembling firms are reducing the value of low wages, which had otherwise justified a major component of the small business sector. New technologies are forcing the abandonment of many small subcontractors who are unable to reorganize successfully, and cost pressures are creating enormous upheavals within the manufacturing sector, forcing small and medium size firms to establish production offshore in lower wage countries or risk losing subcontracts.

Luckily for Japan, demographics, labour shortages and sectoral shifts are easing this transition. Many workers are retiring, core skills are in short supply, and service industries are offering higher wages than are manufacturing industries. Thus fewer people need jobs; skilled employment is plentiful; and for those unwilling or unable to work in manufacturing, service jabs offer viable alternatives. Japanese firms are also pursuing a policy of offshore investment which is intended to preserve domestic manufacturing jobs (Gilpin, 1989). By shifting labour-intensive assembly offshore while keeping high-value-added fabrication operations within Japan, firms conserve the most valuable aspects of global production for its domestic employees.

How the production system will ultimately respond to these problems is debatable. The state has increased its efforts to assist adjustment. Programmes are designed to aid small firms in establishing offshore production facilities. Serious efforts are under way to upgrade the technical capacity of small and medium size firms by applying computers to various tasks (Small Business Investment Co. Ltd, 1989). And in many instances, monolithic entities such as MITI are taking a back seat to other governmental agencies.

Subcontracting: structure and history of the system

Japanese manufacturing is characterized by a hierarchical system of subcontracting tiers. Approximately three-fifths of SMBs in manufacturing are subcontractors in this elaborate system of vertically disintegrated production (Sato, 1983). The tier system orders firms by their relative power and security. First-tier firms are essential to their parent companies and possess formal responsibility for important facets of manufacturing such as R & D and prototype development.2 Firms in the second tier enjoy less autonomy and are more dependent on one or a few firms. They might manufacture critical parts, but they have little input concerning production mandates. Their responsibilities may include the design of the production process used to manufacture a good, but product conception remains the purview of the assembling firm. Third- and fourth-tier firms are marginal - often representing small, family-owned establishments producing a single component for a more established subcontractor.

The evolution of this tiered production system dates back to the second world war. Before the 1940s manufacturing was primarily integrated vertically - much like that of firms in the USA. To the extent that companies subcontracted out production, this took the form of putting-out, similar to such activity in the early mercantile era of US and British industry (Glasmeier, 1990). It was also true that, historically, Japanese firms were

2. Throughout this paper, the term ‘parent company’ identifies the larger firm with which a subcontractor has an important production contract. Although Japanese business subcontracting relationships are intimate compared with US practices, being a parent company does not necessarily imply ownership or any other legal holding relationship.

Japan ’s manufacturing system 399

imitators of other countries’ systems of production, and a large part of total processing capability was oriented towards local consumption (Association of Japanese Geographers, 1980).

The second world war changed all that. Many small firms were called into service to manufacture for wartime material needs. This effort began reshaping the national system of production, and the war devastated the Japanese economy. Large firms suffered complete debilitation of productive capacity and acute shortages of capital. But rather than return to the prewar vertically integrated production system, because they lacked financing capital, large firms found it more economical to subcontract out some functions. Additionally, the terms of the Japanese surrender included the superficial breakup of the Japanese trading companies (zaibatsu) which had previously organized the national economy, particularly manufacturing. Zaibatsu were transformed into modem-day business groups which exerted similar control over Japanese business (Orru et al . , 1989).

The boom of 1955 further strengthened the subcontracting system. Rather than invest in new capital equipment, large firms chose to develop more stable relationships with their subcontractors. Thus they achieved flexibility by passing the prospect of demand fluctuations on to the small business sector (Sato, 1983).

Another era of growth started in the mid-l960s, again causing large Japanese firms to re-evaluate the production system. Companies recognized the need to rationalize their production processes and to tighten up the subcontracting system. Thus they applied production and planning management systems, and products were redesigned to diminish assembly complexity-and reduce the number of parts per unit. Market expansion made it possible for small firms to rationalize manufacturing processes. Simultaneously, a labour shortage developed, and Japanese firms began subcontracting labour-intensive processes to lower-wage countries in Asia. Thus some of the more routine operations were shifted offshore, and system-wide productivity increased (Sato, 1983).

The organizational structure of Japanese business

The operation of Japan’s subcontracting system must primarily be understood as part of an elaborate hierarchical inter-institutional network. Recent pioneering work in this area by Orru, Hamilton and Suzuki describes the elaborate structure of Japanese business which is organized into business groups - intermarket groups and independent industrial groups. These organizations orchestrate firm-firm subcontracting relations through both horizontal and vertical linkages and therefore deserve comment (Orru et al., 1989; Berkowitz and Mohan, 1987; Child-Hill, 1989).

Business groups, not firms themselves, are the primary unit of Japanese capitalism. Table 1 identifies the six key intermarket and independent groups. Market power wielded by these groups is quite apparent. In 1982 these business groups collectively cofitrolled 24% of national sales and 10% of Japan’s workforce. Intermarket groups and independent

Table 1 Intermarket groups and independent groups in Japan

Top six intermarket groups

Mitsubishi Mitsui Tokai Bank Industrial Bank of Japan Sumitomo Fuyo Nippon Steel Hitachi DKB Sanwa Nissan Toyota

Top ten independent groups

Matsushita Toshiba-IHI Tokyu Seibu

Source: Orru et al . . 1989


groups have distinctive traits. Intermarket groups consist of horizontally constructed networks of large firms in different economic sectors. Firms compete across groups but not within them. The major organizing institutions of intermarket groups are banks, insurance companies and trading companies. The structure of intermarket group subsidiaries and affiliate ‘family’ firms is referred to as keiretsu. However, member firms also maintain long-term subcontracting relations with small and medium size firms that are not part of keiretsu. Among the most prominent intermarket groups are three firms that are direct descendants of the zaibatsu (Mitsubishi, Mitsui and Sumitomo). These powerful trading groups were superficially broken up after the second world war but reorganized in a slightly less centralized fashion. Independent industrial and financial groups are webs of vertically integrated firms in one or more industrial sectors. Also organized as keiretsu, each independent group consists of a large parent company and vertically linked subordinate companies. These organizational entities evolved during the 1950s and 1960s during a period of rapid economic growth. Affiliate members of independent groups are more autonomous than firms linked to intermarket groups.

Control among member firms in both intermarket and independent business groups is exerted through stock ownership. Unlike the USA, where interlocking directorates provide a subtle means of interfirm control, business group members maintain control through horizontal and vertical ownership. Groups are usually organized around dominant companies, a banking institution and a trading company. Members of lesser scale and market power are coordinated by various councils.

Financial institutions are usually the leaders of intermarket groups. These organizations exert control through provision of bank loans (a function also undertaken by the state). Banks act as mediators settling disputes among intermarket group firms, and only indirectly influence firm level policy. This pattern of horizontal control extends beyond members of groups and includes shareholding among firms within groups. While each group’s control of its members is paramount, intergroup stockholding is still significant. The pattern of control exerted within and across group members relates to the age of the group. Prewar groups such as Mitsubishi exert stronger intra-group control than groups founded after the war. The end result of this elaborate hierarchical structure of control is shared intergroup responsibility for the inner workings of member firms. While among intermarket and independent groups competition is intense, there is an agreed set of behaviours which groups abide by. Thus competition exists within accepted bounds.

Independent groups, although vertically structured, also exhibit a pattern of horizontal control. Banks are also key actors in independent groups, but their role is less domineering. Iiidependent groups draw their financial resources from more than a single financial institution, ensuring leading industrial firms’ greater autonomy.

Both intermarket and independent groups exhibit vertical control of affiliates and subsidiaries, and through them subcontractors. Whereas intergroup vertical control originates with the dominant firms, independent groups are organized around an industrial group leader such as Toyota. In this case the key independent firm, due to its size and level of vertical integration, exercises heightened control over firms producing for specific industrial sectors.

Vertical control of affiliates, subsidiaries and subcontractors provides three benefits io group members. Control provides them with access to the dual wage structure in Japanese business. Small and medium size business employees are paid lower wages and receive fewer employee benefits than business group members. Leading group members also use vertical control to avoid risk, by shifting uncertainty onto small and medium size firms. Finally, through vertical control, group members avoid developing a bloated bureaucracy.

Debate surrounds the rationale for why groups continue this pattern of vertical control. Advantages from the dual wage system have diminished since the 1960s, yet the pattern of vertical control has increased. Furthermore, risk increases with the degree of dependence upon such a highly linked b u t disaggregated structure of production. According to some

Japan S manufacturing system 40 1

scholars, the persistence of this system rests not with the desire to exert control, but from the shared benefits of its elaborate structure (Orru et al., 1989). At the highest level of the group, members participate to reduce the uncertainty of operating across sectors within a global system of production. Thus keiretsu firms sponsor self-sufficiency among group members. In contrast, the more independent vertically integrated industrial groups gain literally their life blood from their highly vertically integrated association.

Organizing principles of the subcontracting system

Japanese firms subcontract out for many of the same reasons firms in other industrial countries do (Kato, 1989). The most prevalent form of subcontracting occurs when an activity can be accomplished more cheaply by another organization (Holmes, 1986). Subcontracting is also desirable when a firm experiences an excess flow of work. As much as two-thirds of all Japanese subcontracting falls into these categories. Firms also subcontract when they do not have the capability to perform a specific task in-house.

The extensive use of subcontracting in the Japanese system of manufacturing differs from that of other industrialized countries (Sato, 1983). Although it does not display typical manufacturing behaviour, automobile production in both the USA and Japan makes up such a huge portion of total manufacturing that its extreme tendencies are actually significant as the average. For example, in the USA, the Big Three auto assemblers have until very recently been quite vertically integrated: General Motors Corporation has historically produced at least 70% of its inputs in-house. In contrast, Toyota Corporation subcontracts out essentially all production except critical components, and acts as more of a final assembler. By some estimates Toyota subcontracts out as much as 90% of all parts production (Sheard, 1983). Thus the level of subcontracting in Japan is simply much higher than that of other industrialized countries. The subcontracting system encompasses firms of all sizes. Of the smallest companies, almost 70% are subcontractors, and half of all firms (even those in the 300-employee category) are subcontractors.

The level of subcontracting varies across manufacturing sectors. Transportation equipment exhibits the greatest degree (86%), but the level of subcontracting within all durable goods industries and many non-durable goods sectors averages more than 60% (MITI, 1987). This means that virtually all manufactured goods are produced within an elaborate network of specialized production relationships.

Japanese subcontractors are highly dependent upon a few major companies (MTTI, 1987; Sato, 1983), and this dependency is fostered through stock owiiership and financial and organizational affiliations (Orru et al., 1989). Within manufacturing. 70% of all firms sell between 80 and 100% of their output to three or fewer establishments. Remarkably, within the textiles sector, 90% of all subcontractors sell the majority of their output to three or fewer firms. Essentially, all durable and compiex manufacturing subcontractors are heavily dependent on very few firms. ,4s firms increase in size. their dependence upon just a few firms decreases. Slightly more than half of compxies M ith 300 or more employees sell the majority of their output to three or fewer Firms, and 90% of small f i r m sell to three or fewer customers. Thus subcontracting in Japan primarily reflects a system of vertically disintegrated yet captive relationships. For all industries, on average 60% of subcontracting firms receive materials from a subcontractiiig countcxpart, cssentially reflecting a dependent form of production (Sato, 1983).

The system of subcontracting in Japan is quite paternalistic. In contrast with the USA, where large firms maintain an arm's-length rclationship with their sina!i subcontractors, Japanese assemblers exert a great deal of influence -- pmicularly in the ckioice o f process technology (US Department of Transportation, 1982). The assenibler i n q ' also absist S I B S in adopting new technology (and often insists on them doing so). Assistance oftm includes


directions about the use of new technology, organization of production, pricing, the physical layout of production and materials acquisition (Taya, 1989).

The dramatic growth of the Japanese economy over the last 20 years has expanded the influence of small businesses. Some experts now describe the Japanese system as consisting of more equal relations between subcontractors and parent firms (Patrick and Rohlen, 1987). As parent firms have become more dependent on their subcontractors, more and more responsibility for product development has been passed along (Sato, 1983; Patrick, 1986; Aoki, 1987). Relations have become longer term and more interdependent, allowing for greater specialization by individual parties. And as products have become more complex and differentiated, Japanese firms have simply increased cooperation.

The Japanese subcontracting system exhibits a high degree of specialization. Small firms divide production tasks into minute operations which are then distributed among networks of even smaller firms. The system is highly efficient and effective due to the extreme division of labour (Sato, 1983; Association of Japanese Geographers, 1980; Wantanabe, 1985). In many instances, firms subcontract out functions which cannot be accomplished in-house (Sato, 1983). By some estimates, 30% of subcontracting firms are responsible for the design and development of new components. Rather than adopt specialized production technology, companies will employ other establishments which exhibit high levels of specialization for specific tasks. Thus subcontractors in Japan play a vital role in the transfer of technology and the increased technological capacity of the entire production system. For example, Sat0 (1983) reports that Japanese firms specialize not only in single products but in production processes as well. This level of specialization allows each component of the production system to be highly focused, extremely productive and motivated to innovate as new technologies are developed.

The production system is best described as networks of firms which pass work orders to one another as specialized tasks become evident (Ide and Takeuchi, 1980; Murata, 1980). Thus in a sense, a subcontracting network receives a job which is subsequently broken apart into specialities and distributed among member firms. Within a network it is possible to find an entire production process subdivided among a vast number of small firms. Thus, for many companies success is dependent on membership in a productive manufacturing group.

The Japanese system of subcontracting is highly competitive. Subcontracts are let annually and renewed based on quality, price, physical transport (literally the transmittal of the good from the producer to the consumer) and overall service. One need only drive through Tokyo streets at night to see small firm representatives scurrying between shops and assembly firms. As one industry expert somewhat facetiously pointed out, production often continues in the transport vehicle on its way to the final destination (Sugiura, 1988). Relations tend to be long-term, but subcontracting firms operate in fear of losing business. It is not the prospect of the loss of a single order which motivates this uncertainty. In some cases, the system may be so interdependent that if a subcontracting firm is rejected for quality reasons by one firm, it may lose access to other market outlets too. Once removed from an assembler’s list of competent suppliers, it is difficult to win work back.

The evolution of the Japanese subcontracting system

Until recently, small business was considered to be thriving (Wantanabe, 1989). But with the revaluation of the yen, both small and medium size firms are in serious jeopardy. Large cornpanies are pressing for continuous cost savings, and small firms are being pushed to their limits. For example, with the recent enactment of a national 3% sales tax, small firms found the new costs passed directly on to them. And over the last five years, as large firms have been forced to restructure and have often moved into entirely new areas of business, subcontractors have been abandoned. Problems of rationalization are greatest

Japan s manufacturing system 403

for firms in the third and fourth tiers. These companies have the least access to capital for restructuring, and they employ the more marginal members of the workforce. But even first- and second-tier contractors are now threatened. By some estimates, as many as two-thirds of small Japanese firms are in grave danger of becoming redundant due to global industry restructuring (Wantanabe, 1989).

As the previous section on inter-firm relationships suggests, few firms operate independently of business networks. Japan’s subcontracting system is literally a dense web of inter-firm relations which work collectively to maximize the business opportunities of member firms. However beneficial to the overall economy, though, this network is not unquestionably supported by all participants in the hierarchy. At the lowest levels in the chain of control, subcontractors - overwhelmingly small and medium size firms - toil for the benefit of the system. As few English-language examples of the intimate internal workings of Japanese subcontractors exist, the following short case studies are given to illustrate that the firm-level experiences of the Japanese manufacturing system are mixed, at best.

Case studies Our exposition of the situation of small business in Japan has been supplemented by a discussion of Japanese industrial structure. This focus arises from the obvious importance the production system possesses in the organization of the national economy. The following two case studies of Japanese firms help to highlight some of the structural problems facing small businesses in Japan. The companies interviewed represent different perspectives on the experience of small business. Taya Company, an automobile parts producer specializing in metal machining for brake assembly, has moved up the subcontracting chain while remaining dependent on large assembly firms for product designs. Ebina, a plating company, draws a major portion of its business from metal-plating services provided to a few large firms, but has successfully made the transition into new plating technologies including plastics and, more recently, ceramics. The two firms’ experiences are distinct, Both are subcontractors, but Taya remains dependent upon a single sector - auto parts. Ebina has successfully moved through generations of technology to the point where it now markets its own products.

Reasons for the differing outcomes Several factors are important in explaining the divergent experiences of the two firms. Both are family-owned businesses started in the 1940s. The founder of the auto parts firm has retained responsibility for operations, while in the metal-plating company the founder’s son has taken over daily management. Both firms are subcontractors. The former is dependent upon a single firm within the auto parts industry subcontracting chain, while the latter enjoys a more diversified market base. The auto parts firm consists of approximately 20 workers, and the plating operation employs 100. As others have pointed out, size is a critical determinant of subcontractor independence (Sato, 1983; Wantanabe, 1989).

The two firms’ experiences diverge when markets and skills are compared. The auto parts producer is typical of organizations manufacturing for large assemblers. It has evolved into a second-tier subcontractor possessing a regular and long-term relationship with its primary customer. This larger firm negotiates contracts on a three to six months basis, allowing for price negotiation at prespecified intervals. Because Taya possesses no proprietary technology, it is easily caught up in bidding wars with other subcontractors. The highly competitive environment reduces profits to the point where it is extremely difficult to accumulate the resources necessary to conduct research and development. Thus while the owner acknowledges the desire for greater autonomy, he laments his current limited options (Taya, 1989).

Taya feels compelled to maintain current technology. This is accomplished in two ways. The owner remains alert to changes in technology and regularly attends equipment


fairs, confers with other subcontractors in the subcontracting chain and consults with competitors. Additionally, new technology is introduced by the primary customer, who regularly visits Taya to review operations and check on quality control. This larger firm assists with rationalization as needed. Occasionally the larger firm will finance new equipment. Taya’s owner indicated that hard work and long hours have given him some security, but success can evaporate if cost or quality are not maintained.

Thus the incentives for adding new technology are threefold: to remain price competitive, to increase quality, and to reduce labour inputs. In almost every sector there is an abundance of employment opportunities, and the primary reason for introducing new technology is labour scarcity. This is particularly true in skilled fields. Many firms are automating simply to reduce the need for additional skilled workers.

Taya’s skill base is maintained through local vocational education schools which provide newly graduated assistants. The owner’s son developed his skill through classroom and on-the-job training. Taya has had occasion to assist employees in breaking off to found new start-up subcontracting companies. These firms perform activities which, due to their noise levels or other undesirable characteristics, relegate them to more remote sites. Because wage increases taper off after approximately eight years of working for a relatively small subcontractor, workers hoping to achieve some personal independence are usually amenable to operating in this capacity - even if they are aware that parent firms have expectations of benefiting in a supplier capacity (Patrick and Rohlen, 1987; Sato, 1983).

Although Taya has a core competency (the ability to machine at small tolerances in variable size batches), it has not achieved independence within the subcontracting system. Capital- and land-rich, the owner works long hours to maintain contracts. The firm has had occasion to use government programmes for equipment purchases, but the owner commented that he preferred to expand through retained earnings. Repaying government loans creates additional cost pressures, particularly during economic downtprns .3

The Taya company typifies second- and third-tier dependent subcontractors in the Japanese system of mass production. Although able to maintain currency in production technology, the firm has been unable to expand beyond either its original product or mode of organization. It might be argued that Taya has few unique competencies which differen- tiate it from other subcontractors. Despite successive changes in the external environment, through hard work and good business management the firm has remained viable. But Taya is under constant pressure to reduce costs and maintain quality, and success is always uncertain.

In coptrast to Taya, Ebina is a firm which has capitalized on core competencies, assisted by infusions of new information and technique. Ebina’s business base is subcontracting for various companies (including Honda). Nevertheless, the strategic significance of Ebina’s metal-plating activities has been declining over time. Viewing the growing market for data processing equipment as an important opportunity to capitalize, the firm developed the capacity to plate plastics. Ebina is now one of three firms in Tokyo that plate laptop computer cases. Plastics was identified by the owner’s son as an emerging market about 10 years ago, and after some time Ebina developed the capacity to plate different types of plastics. Metal-plating operations stiil constitute 90% of the firm’s output. but this represents only 50% of sales. High-tech plating (particularly plastics) is a growing portion of their business, and the firm expects this to be the key to success over the next five years (Ebina, 1989).4

Ebina recently introduced an entirely new family of products: metal-plating ceramics for the telecommunications and microelectronics industry. The new products range from chip packaging leads to fibre optic cable plating for special-purpose applications. The process

3. The Tokyo metropoliran government provides below maiket-rate loans with favourable terms. 4. Plastic plating i s a product which ctilizes high-technology chemical engineering proccssea. ,Additionally.

the platmg’s niost common application is on high-tech equipment aiid components.

Japan s manufacturing system 405

is very efficient and effective and is capable of replacing certain aspects of screen printing, wire bonding and cable sheathing. The son developed the technology while pursuing a PhD in chemical engineering at Keio University, and he subcontracted the prototype work to another student in the laboratory. The multi-application plating process was perfected at the university and then transferred to Ebina’s plating plant. Development and construction of a laboratory capable of applying the manufacturing technique was financed through retained earnings. The son built the laboratory himself in spare space within the plating plant.

The son currently undertakes both sales and service of the new products. His customers include Japan’s national telecommunications company and other high-tech firms. He also travels to the USA and Silicon Valley in search of buyers. This new product is expected to eclipse metal-plating sales in just a few years.

Entry into microelectronics-based production has required new staff, and the firm has hired two chemical engineers from Keio to run the operation. If the new high-tech processes achieve good rates of success, the owner will probably establish a new microelectronics-based plating operation.

The role of the state

The economic crisis currently confronting Japan is one of the most serious in the postwar period. Emerging from the second world war, the Japanese economy was reorganized with a strong government role. Later shocks such as the oil crisis of the early 1970s and recessions occurring throughout the decade mandated further state involvement in the rationalization of the subcontracting system (Sato, 1983). Thus, as the following discussion indicates, Japan’s resulting system of production consists of a partnership between business and the state.

A common perception of Japan is that centralized government agencies guide the nation’s economy. The emergence of MITI is only the most visible sign of the state’s role in the national economy (Johnson, 1982). MITI has been responsible for targeting industry, rationalizing entire sectors and executing plans for the redevelopment of the national economy. Certainly in the immediate postwar years, this model of the Japanese system proved accurate. As a result, most authors on the subject of Japanese industrial structure focus on the role of the state in the rationalization of large firms and entire sectors. There is comparatively little information about government’s role in the small business sector (see Friedman, 1988; Patrick and Rohlen, 1987 for exceptions). Yet to understand how the system has been successful at renewing itself in the face of natural resource supply crises and current exchange rate adjustments, we must examine the interaction between the state and both large and small firms. Here we present a limited discussion of this important institutional facet of the Japanese economy.

For the sake of brevity, we will not elaborate a detailed model of government’s role in the Japanese economy. Instead, the focus will be on the role of the state in the rationalization of the small business segment of the economy (see Child-Hill, 1989, for examples). Only a brief summary will be given here, since ample documentation is available describing government programmes in Japan.’ Previous discussion suggests that the degree of control exerted by business groups in the small business sector is significant. The state reinforces and extends the institutional influence characterized by both assistance to and pressures on small businesses in Japan.

As in other nations, in Japan the ‘state’ is the arbiter for transactions between various economic groups; but government’s influence in the regulation of small business far exceeds that of most other industrialized countries. For example, in the United States the state

5 . See References for prograinme listings.


primarily placates small business through modest financing programmes. The Small Business Administration (SBA) provides limited funding and almost no direction in the proper administration of small firms. In fact, many of its programmes are notoriously difficult, if not impossible, to access. On the other hand, in Japan the federal government exerts a great deal of influence on the structure and composition of small businesses through financial, land and consumer markets.

Comparing the levels of financial support provided by the US and Japanese governments in the workings of small business underscores the differences between the two countries. In 1982 the US Small Business Administration had $3.8 billion in outstanding loans to small American businesses. In Japan, a nation with roughly half the population of the USA, the government had loaned out $66 billion. And while small Japanese firms also benefited from loan guarantees of $21.8 billion, only $1.6 billion was guaranteed as loans to small businesses in the United States (Patrick and Rohlen, 1987). Of all small firms which request funds from the Japanese Credit Corporation, 92% receive assistance, and the state, through various financial intermediaries, provides 13% of all funds for small business plant and equipment. As with US programmes, the Japanese subsidize interest rates at below market rates.

This institutional funding is not without a price. Small firms are often required to send representatives to training seminars on small business management and to open their books to lending institutions. For example, in 1984 approximately 68,000 people were trained by the Institute of the Japan Small Business Corporation (1987a), and another two million enrolled in mutual relief programmes which provide insurance in case of small firm catastrophe. Thus participation in programmes often comes in a package: receipt of funding commits a company to training and evaluation. By Western standards, state involvement in small businesses’ affairs is significant.

Japanese programmes assisting small business are extensive. In the early 1950s, MITI set up the office of Small and Medium Enterprises, which is responsible for setting national policy to be carried out by bureaucracies at lower levels of government. Some of the more interesting programmes include the Japan Small Business Corporation. This organization provides funding for activities such as structural upgrade projects, which assist small business in keeping up with new technologies and modem forms of manufacturing, and environ- mental improvement through the physical transfer of small businesses from areas of congestion and high land prices to new industrial zones. Funds are available for factory expansion, pollution control and improvement of the working environment.

The agency also assists small businesses in upgrading operations. This programme brings together groups of small firms and trains them in modern business practice. Addi- tionally, there is a major programme designed to assist small business in adapting to changing business conditions. The Japan Small Business Corporation attempts both to strengthen small businesses’ abilities to export products and link up with large assembly firms, and to maximize the economies of scope found among groups of small businesses (1987b). In 1989, programmes were introduced to help firms contend with problems arising from enduka and the internationalization of the Japanese production system. Small firms receive assistance in shifting production offshore, maintaining links with subcontracting firms and exporting to other countries (MITI, 1987).

The majority of these programmes are administered through prefectural governments. Interviews with the Long Term Credit Bank of Japan indicated that the national government pushes assistance down to the lowest political level possible. Local government is believed to be more aware of small businesses’ problems and therefore better able to provide direct and rapid assistance (Long Term Credit Bank of Japan, 1986).

The banking system is also decentralized. Within each prefecture exists a designated development bank. This entity is responsible for assessing the capital needs of small firms. Banks assist in developing business plans and production targets. On the surface, borrowing terms appear quite liberal; but banks loaning money require small firms to develop and


execute a reasonable business plan. The bank requests great detail about how funds will be expended, and if small businesses deviate, they must repay their loans (MITI, 1987).

Regional banks are highly tuned to the structure of local small businesses. They are therefore more likely to invest in firms demonstrating competency in prevailing regional industry. Deviants find it difficult to secure financing. This limitation tends to reinforce the existing industry structures of regions rather than assisting in any evolution to new industrial bases. Some regional banks are more farsighted than others and can identify new products which have market potential. The bank in the Nagano prefecture (Japan’s second most prominent precision-machining centre and home of Seiko) was more enlightened than others (Long Term Credit Bank of Japan, 1986). This may have been critical in the establishment of a wide variety of firms in the region.

The small business sector also provides assistance through associations known as shokokai. These non-profit organizations are trading groups which facilitate small business development. Programmes include training and management planning for taxes, accounting, business administration and labour relations. The trading group is financed by central and local government subsidies. The shokokai also assist small businesses in finding markets and in disseminating information about products and services. Shokokai view themselves as contributors to overall ‘regional development’. As such, their efforts include improving shopping districts, providing street lighting, parking and other infrastructure needed for commerce (Central Federation of Societies of Commerce and Industry, 1987).

The non-profit status of shokokai is viewed by its members as necessary for impartial promotion of local small businesses. The societies are established by communities (city, town or village) only when at least half of the local traders are willing to join. Although highly decentralized, these organizations are represented at the prefecture and national levels. They possess some capacity to organize the financing of small businesses and often act as the intermediary between a firm and the local bank. Some financial assistance is available, but these groups offer primarily technical support.

The Shoko Chukin Bank is another institution which provides assistance to Japanese small business. Founded in the late 1930s, the bank has been charged with the responsibility of ‘promoting the establishment of small business cooperatives by loaning funds for their activities’. The Shoko Chukin Bank operates in principle like the US Co-op Bank. In 1987 the bank had 27,000 member cooperatives and $15 billion on deposit; it had $52 billion in outstanding debentures, and made $61 million in loans (Shoko Chukin Bank, 1987). This bank directly funds joint ventures between factories, stores and warehouse facilities. Additionally, it supports rejuvenation of shopping districts and other modernization activities, and provides natural disaster and recession relief loans to prevent chain bankruptcies of subcontractors affected by the demise of a large corporation. Shoko Chukm Bank is also involved in offshore marketing of small business products, and provides management consulting and information services about world markets.

In 1985 a programme was initiated in response to the yen revaluation crisis (Kato, 1989), which has begun to bring together small and medium size businesses in the development of new products. Many of the goods previously produced by these firms for export, and importantly for domestic consumption or inputs to larger firms, are being replaced by imports from cheaper Asian countries, and as a result many companies’ markets are virtually evaporating overnight. This new programme is designed to help businesses team up to develop new products. The state’s role is that of financier and feasibility analyst. Because companies belong to elaborate subcontract networks, they team up through established communications channels to present ideas to the government for evaluation. If a project is feasible, funds are provided to develop the prototype. Usually the larger of two firms is responsible for developing and executing the marketing plan. If the product can be successfully manufactured, then the consortia is assisted in the development of the manufacturing process and marketing channels.

As this programme is very new, it is impossible to evaluate its success. Administrators

408 Amy Glasrneier and Noriuki Sugiura

of the programme (much like social workers) stay in close contact with the small firm participants. Of 140 firms that have applied in Tokyo, 28 have successfully brought new products to market.

The role of geography in the structure of the Japanese system

These institutional factors operate in a geographic context in which both the country’s population and its productive capacity are concentrated within a single region - Tokyo (the ‘supercomplex’: Miyakawa, 1980). With 30% of the nation’s population and an even larger share of Japan’s productive system, Tokyo is the national average. Therefore, addressing a region’s role in the national economy requires recognizing that areas peripheral to Tokyo are dependent.

Tokyo’s role in the organization of the Japanese economy is the subject of numerous academic treatments and therefore will not be rehearsed here (Glickman, 1979; Glasmeier, 1988; Child-Hill, 1989; see additional items in the References section). However, it is necessary to point out how this superconcentration of economic activity affects the structure of production by allowing extraordinary geographic specialization. The social division of labour is the human expression of this geographic production system. With more than a third of the nation’s productive apparatus concentrated in one metropolitan complex, any attempt to understand Japan’s cities and regions requires that we acknowledge the physical limits of the manufacturing organization.

Tokyo is the nucleus of the Japanese system. It is a concentrated geographic region which, despite government attempts to enact policies to decentralize population and industry, has continually expanded beyond its borders over the postwar period (Glasmeier, 1988). Programmes to steer population outside the region have repeatedly failed. Urban policies of the late 1980s therefore sought to redevelop the Tokyo metropolitan region to improve the efficiency and effectiveness of the city for residents and business (Miyao, 1987; Child- Hill, 1989). By one account, Japan can expect that by the year 2000 other metropolitan areas will actually decline in importance as Tokyo continues to expand outward (Sugiura, 1989).

The highly fragmented and decentralized system of production has been a major reason behind the failure of policy to spread economic activity to other regions. With the exception of the government’s dramatic development of Tsukuba Science City, research and development, corporate headquarters and government functions have remained concentrated in and around the Tokyo-Osaka region. More importantly, given the elaborate subcontracting system, it is illogical to suppose that small firms would shift out of their market areas and risk their attachment to the production system.

The impact of Tokyo’s dominance is evident in numerous statistics. More than 40% of all machining firms are concentrated in Tokyo (Murata and Takeuchi, 1984). While some government and industry headquarters decentralization is evident, the vast majority of corporate control functions remain within the centre of the city. Corporate R & D has decentralized somewhat, but movement has been only as far as Tokyo’s suburbs. These intra-metropolitan movements further tax the system, and workers still commute long distances. No single constellation of new activity has emerged anywhere else.

Even Tsukuba Science City remains dependent upon Tokyo. Professional and technical workers have refused to relocate to the city. Workers commute to Tsukuba during the week and live in bachelor apartments. Thus the nation’s billion-dollar experiment to establish a new technical centre outside of Tokyo has been unable to sever its umbilical cord (Glasmeier, 1988).

Rising land values have created a greater crisis for small firms. Regardless of city size, the shortage of land and pressures for conversion to more profitable uses are making business expansion difficult. Given the fragmented nature of production, small firms are


found in tight geographic constellations. Because of their network associations, they are prohibited from decentralizing. Thus even firms which do own land must remain in their clusters for reasons of industrial access; and for firms which do not own property, real estate costs serve to further lock them into existing locations. Small companies must become ever more efficient simply .to pay increasing rents. Thus pressure to remain competitive comes not only from the system of production but also from the land market.

/

d 0

0 300 km b

o d Figure 1 divided into six regions. 7he Puci’c Coastal Belt is cross-hatched (source: Murata, 1988)

The four principal islands: Honshu, Hokkaido, Shikoku and Kyishu; Honshu island is

410 Amy Glasrneier and Noriuki Sugiura

In some cities, local authorities use their fiscal power to assemble parcels of land for industrial development. For example, in Suwa the government bought farms on the outskirts of the city and converted this land into an industrial park. Small firms have been offered inexpensive leases to relocate out of the central city. Local government subsidizes these parks heavily: 80% reductions in the leased value of the land are not uncommon.

Since 1975 Japan’s major business groups have been shifting production abroad (literally around the globe) in response to rising domestic wages and land prices, and more recently to counteract the protectionist measures of developed countries (Douglas, 1988; Giraud, 1987; Godet, 1987). Peter Dicken (1988) chronicles the shift as consisting of three major moments: the oil crisis in the early 1970s; the first yen revaluation in the late 1970s coupled with protectionist pressure from developed countries; and the second revaluation of the mid-1980s. The first outposts of Japanese foreign direct investment (JFDI) were establishments owned by intermarket and independent group firms. This movement occurred both within Asia and to the USA. As time passed, subcontractors were compelled to shift labour- intensive low-value-added production to other Asian countries simply to remain competitive. While the share of all Japanese shipments from offshore facilities is low compared with other developed nations (e.g. the USA and Germany), the rate of increase is phenomenal by Japanese standards (Mroczkowski and Hanoaka, 1989; Child-Hill, 1989; Gilpin, 1989).

The effect of JFDI on the spatial distribution of production within Japan is only now becoming evident. Like the USA, according to recent research JFDI has diminished the spread of production employment to Japan’s hinterlands while reconcentrating remaining new domestic manufacturing within the Tokyo-Osaka region (Murata, 1988; Figure 1). Analysing the Technopolis programme (Japan’s most concerted recent policy to bring manufacturing prosperity to the country’s hinterlands), Kiyoji Murata shows new manufacturing plant locations primarily occurring outside technopolis-designated cities. Manufac- turing industry continues to concentrate within the core region of Tokyo and its surrounding periphery (Fujita, 1988). High-tech plants show a slight increase in more remote regions, particularly southern Kyushu, where semiconductor mass production plants have concentrated. Still, the vast bulk of manufacturing shipments originate in Tokyo-Osaka metropolitan region. Murata concludes that Tokyo remains the nation’s ‘mother technopolis’ and dictates the growth of exterior regions.6 These results verify Sugiura’s argument that Japan’s recent development is only strengthening Tokyo’s status as the nation’s ‘primate city’. While engulfing its immediate periphery, the wealth of Tokyo is not evenly spreading towards the country’s hinterlands .7

6. Recent evidence of manufacturing concentration within the Tokyo metropolitan region is given in the tables below.

Regional distribution of manufacturing industries by shipment (%)

1965 1915 1984

H o kk a i d o Tohoku Kanto Chubu Hokuriku Kinki Chugoku Shikoku Kyushu Okinawa

2.6 4.6

35.5 16.2 2.3

23.5 7.1 2.4 5.1 0.0

2.5 5.5

34.1 16.8 2.4

20.6 8.3 2.9 5.9 0.3

2.0 6.0

36.2 18.4 2.3

18.7 7.6 2.6 5.8 0.2

Source: MITI (Murata, 1988).

Japan’s manufacturing system 41 1

More recent analysis of Japan’s changing industrial geography since endaka confirms this dual pattern of concentration and international decentralization. Examining the 1981 -6 period (capturing the first effects of endaka), Edgington (1990) notes that Kyushu’s pre-1980 development has been reversed. Reconcentration of growth towards Tokyo is evident not only in manufacturing but in services as well. Edgington notes that 8 out of 10 jobs created in services occurred in the dominant metropolitan Tokyo region.

Thus the fragmented Japanese production system and land use constraints keep small businesses glued to specific regions. Pressures from large assemblers force innovation and rationalization on firms in the manufacturing sector. The state acts as the arbiter through the provision of capital, land and market information. While the effects of external events (oil shock and yen appreciation) can be mitigated by the state, increasingly this assistance can only soften the blow to the small business sector.

End& has created yet additional pressures on small firms. Competitive success now turns on both continued rationalization within existing businesses and the ability of small firms to undertake spatial decentralization to lower their operating costs. What is the composition of small firms remaining in Tokyo? The revaluation of the yen will probably result in the demise of the most inefficient small, family-owned establishments. Tentatively we speculate that the enduring firms will be those that are critical to existing product lines and pre-configured production systems, and those providing the basis of new product development for Japan’s major business groups. Certainly, the small firms which remain face the continuing pressures of taking whatever steps are necessary to remain competitive.

The state’s role looms large during this transition. New policies for small and medium size enterprises provide some insight into the state’s role in this period of uncertainty. New programme mandates include subcontractor orientation to foreign direct investment, small firm coordination to achieve economies of scale and sectoral shifts towards goods for domestic consumption.

Regional distribution of newly built factories (%)

All manufacturing industries 1982 1983 1984

High-tech industries 1982 1983 1984

Factories Hokkaido Tohoku Kanto Chubu Hokuriku Kinki Chugoku Shikoku Kyushu

1822 4.5

16.6 25.1 10.8 6.6

10.8 7.6 5.8

12.2

1856 5.2

18.0 25.3 10.6 6.1 9.2 7.3 5.1

12.9

2357 4.6

20.9 25.5 11.5 5.6 9.0 5.8 3.1

14.0

180 1 . 1

31.7 33.4 6.5 5.4 7.5 7.0 1.6 8.6

260 2.0

33.2 33.9 5.3 4.6 2.3 3.4 3.0

12.3

453 2.4

32.9 31.6

6.8 5.1 5 . I 3.1 2.6

10.4


Factories established in Japan and 14 technopolises designared in 1984

1984 1985 1986 1987

Japan 2364 2537 2522 2563 Technopolis 174 167 153 141


7. I am grateful to Bennett Harrison for pointing out the primate city as a suitable descriptive image of Tokyo.


Summary and reflections

It is currently fashionable to look towards Japan as the best case example of how a developed country should respond to a period of heightened international competition, rapidly evolving technologies and new modes of production organization. But, although inspiring, few countries share similar historical or geographical experiences, so comparisons with Japan must be made cautiously.

It is critical to recognize that many factors - only some of which can be engineered - figure in the evolution of Japan’s economy. Large firms are key pacesetters in the evolving system. Companies clearly choose to focus on core technologies and purposefully construct competitive advantages. This occurs within a system which responds to the market through the uptake of new technologies, the collaborative development of new product and process technologies, and with an institutional apparatus which works with firms - sometimes to the detriment of individuals - for the betterment of the economy. But Japan’s production system is not immune to the problems faced by other nations. For example, -when an industry sector must be entirely restructured, it is unlikely that the Japanese system works flawlessly at smoothing the social and economic transition of an industrydependent community. Every nation has its Pittsburgh. However, on an ongoing and evolutionary basis, Japan’s system is simply easier to adjust. The permanent mandate to remain in motion when faced with uncertainty ensures greater flexibility and more rapid industry response.

Authors have attributed Japan’s success in manufacturing to a variety of non-geographic factors. But the constraints of the nation’s geography have had a powerful influence on the structure of the Japanese manufacturing system. Within a land area roughly equal in size to California live almost 122.2 million people (1987 estimate). Moreover, only 25% of Japan’s land mass is even habitable, so neither population nor production can spread haphazardly across the landscape. There are also various formidable geographic barriers. The Japanese system’s evolution as nested clusters of integrated economic activity should not be construed as arising by choice or even in response to industry organizational mandates. Rather it is the outcome of necessity. Japanese manufacturing’s apparent success is in spite of its unique physical constraints. Therefore, in attempting to emulate the Japanese experience, we must acknowledge that the physical manifestations of manufacturing are as much a function of geography as they are a reaction to production mandates. Historical and physical constraints have been significant in determining Japan’s manufacturing success. Insignificant attention has been paid to the primate city status which must be accorded Tokyo. For only a brief period, when Japan’s business groups actually controlled the effect of their location decisions, did the nation’s peripheral regions benefit from production decentralization. This relatively short time period has now given way to the reoccurring tendency of primate regions to denude their periphery of productive potential. So what we can learn and potentially apply in systems which are not so constrained must take these factors into consideration.

As for the future, Japan’s experience with foreign direct investment (FDI) underscores the difficulties a nation faces in attempting to control the wealth-generating capacity of its firms. Unlike other developed countries, Japanese firms have consciously sought to maintain high value-added functions within the home country. Nonetheless, increasing pressures by US and European trading partners to extend R & D functions as part of FDI may only temporarily be held at bay.

In considering the importance of a system of production different from our own, it is incumbent upon scholars to recognize historical and organizational limitations of those systems. For what appears to be an extraordinary model of industrial development today may simply reflect a stage in Japan’s continuing economic development. Only the future will provide an answer to this prospect.

Japan ’s manufacturing system 413

Amy Glasmeier, Graduate Program in Community and Regional Planning, Sutton Hall 3.120, The University of Texas at Austin, Austin, Texas 78712-1 160, and Noriuki Sugiura, Department of Geography and Economics, Keio University, Tokyo, Japan

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