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Japanese Interfirm Networks and Their Main Banks

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Transaction cost economics introduced the concept of hierarchy (or company) to explain the raison d¡¯etre of the firm. The existence of the firm beside the market stands as a puzzle to neoclassical economics. If all the resources are distributed through the market mechanism, why there should be the company? Activities in and out of the firm are intrinsically economic one which is not that different from the one performed on the market. But those are not performed on the based on price mechanism. Then what¡¯s the rationality of the existence of the company? Setting up the company could be considered as rational economic action? Judging from experience, it¡¯s definitely so. Transaction cost is introduced to solve this discrepancy between theory and practice. Market activities are inherently bridled with ¡®incomplete information¡¯. ¡®Rational¡¯ market actor should rely on limited information to transact on the market (bounded rationality). The bounded rationality invites transaction cost beside nominal price on every transaction. The company is the device to reduce that cost. Its explanation seems successful. And thereafter transaction cost economics has become the dominant theory in economics of organization. But it pulls another puzzle towards us: it sounds great. Then how to explain the interaction between firms? They cite the opportunistic behavior between contractors. But examples of Japanese firms counter such modeling. Company lives with other firms. They compete and cooperate with each other. It goes without saying that their basic motive is selfish: making money, in other word, market-rational. But like all other human affair, their relation presupposes the rule and the other. The rule could be formal statute or implicit custom. The other could be competitors, or suppliers, cooperators, customers. Transaction cost economics retains the limited rationality model of economic man. So a limited picture is it that they can¡¯t draw up whole story of reality. Here comes the concept of institution and network.
This book is a case study of Japanese interfirm network, widely known as keiretsu. Japanese interfirm network has been recognized as very unique one. Competition and cooperation between Japanese companies are not entirely market-based. ¡®Trust¡¯ has been attributed to it to describe their relationship. But author argues that they make some points, But such a story lacks clarity, and that, does not fit well into the reality of Japanese business. Drawing up a realistic picture is the aim of this book. Such a drawing needs the in-depth field research from scratch. There has been plethora of literature on Japanese keiretsu, but, author argues, not much useful one based on real story. For example, according to the dominant theory in the West, Japanese main banks take the role of corporate governance instead of market. They play the role of signaling, monitoring and rescuing in the behalf of themselves and other stakeholders. But author argues that that kind of picture is no more than tatemae (socially correct story). The honne (real story) is quite different. The relationship between main bank and its client firm is imbued with ¡®relational transaction¡¯ and power imbalance. Relational transaction is peculiar to Japanese business. To do business, company should take part in some group. This is what is called as trust. But it¡¯s far from pastoral scenery. Basically, the relationship functions as power amplifier to the firm: to mobilize as much resources as possible against other. Resources are like these: financing, information, political clout on regulatory bodies, customers, and the like. So we can conclude that inter-group relationship is inherently political. But interfirm relationship within group is far from genial. It¡¯s characterized by the power imbalance based on resource imbalance between them. The relationship between main bank and client firm is based on information imbalance. Here main bank take the upper side. Contrary to tatemae, such as monitoring, rescuing, their relations are deeply based on self-interest.

Few Americans have the experience and breadth of knowledge about the Japanese economy as Mark Scher, who has spent the last 25 years mining its secrets. Finding that most western Paradigms about the Japanese economy don't fit the facts, Scher developed his own. Scher's work is widely known and respected in Europe (his Phd is from the University of Manchester, no less). However, our "Chicago School" economists will not be satisfied with a perspective that suggests that something other than a totally free market can work.