Question One: Compare the post-war Keiretsu inter-firm structure in Japan with the pre-war Zaibatsus. Explain the reasons why the Keiretsu were important to Japan’s economy in the 1950-1990 period, and why they are now considered to be a major cause of its current structural problems.IntroductionThis paper reviews major theoretical and empirical work on comparing the Keiretsu and Zaibatsus as well as the importance of Keiretsus in the process of Japan development during the 1950s to early 1990s. Firstly, I compare the pre-war Zaibatsus with the post-war Keiretsu in concepts, history, structures and governance perspectives. This article will reviews major theoretical and empirical work on vertical and horizontal Japanese keiretsu. I then discuss changes in the Japanese economy during the post-war period from 1950s till 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 facts regarding the role of keiretsu in the Japanese economy. Thirdly, this article will analyse the structural problems of Keiretsus on the globalisation context.Backgrounds of Zaibatsus and Keiretsus in JapanJapanese Zaibatsus developed mostly from the Meiji era (1868-1912). By the turn of the century, Japan had given birth to several groups of widely diversified companies, each of them owned and operated by a single family. With the wealth expansion of these families, they became the nation’s new aristocracy, the “financial cliques” or the Zaibatsus. The Zaibatsu is generally understood to be a diverse group of large industries controlled by a single family, usually through a central holding company. According to Miyashita and Russell (1994), a Zaibatsu is “nothing morethan a l arge industrial combine” on its initial strcuture. The actual growth of the Zaibatsus began in 1914, World WarⅠ, Japan supplied munitions and other goods to the Allies. Without the competition from European companies, Japanese firms were free to expand internationally. During that five years, the export of Japan increased 266%. The Big Four----Zaibatsus are Mitsui, Sumitomo, Mitsubishi and Yasuda used their profits to start their own bank. The Americans initially wanted to dissolve all the zaibatsu after World WarⅡ, as they saw them as undemocratic and the finance behind the militaristic government of the 1930's (see .wa-pedia.).Even though Japan's economy made huge strides in economic reformation after the WWⅠ, the Zaibatsu interests began to enter the political arena to support their interests. Their activities became entwined with the government in wartime Japan. Eventually, the Potsdam Declaration that was signed in 1945 required the liquidation of the Zaibatsu to democratize Japan's post–war economy. As explained in the previous article, by 1945 the zaibatsu had grown to control a significant portion of Japanese trade and industry. In addition, for the purpose of controlling economic power, special provisions were included in Japan's Antimonopoly Act for the specific purpose of forbidding holding companies and limiting the acquisition by financial enterprises of stock of other companies. In hindsight these provisions might appear to have been ineffective barriers to the creation of excessive economic control and equally ineffective as measures to ensure competition in Japan's economy. These arguments were made when Japan enacted the Act for partial Amendment of the Antimonopoly Act in 1997 by which act Japan finally eliminated the 50–year old ban on holding companies.Compare pre-war Zaibatsus with the post-war KeiretsusThe zaibatsu is a diversified group of businesses owned by a family. Mostly had origins in non-manufacturing sectors in mining, shipping and most importantly, banking. Then diversified not by integration but by shareholdings and representatives on Boards of Directors of separate firms. The Keiretsus are conglomerates similar to pre-war Zaibatsus but not family owned and with a bank at its heart and with one of the following forms (Miwa, 2003):1. General trading company able to handle gigantic and diverse volume of commerce2. Production oriented group3. Distribution oriented group based on network of small retailers4. Large retail or RR companiesWithin years of dismantling the Zaibatsu, changes on both the domestic and international fronts are thought to have led to a relaxation of regulations upon the concentration of economic power in Japan. On the latter front, following the establishment of communist China, U.S. foreign policy toward Japan could be seen shifting to one supporting a shoring up of Japan's economic power. Secondly, industrial growth and increased production capacity in Japan supported the U.S. need for supplies during the Korean War. Under this circumstance, the Ministry of International Trade and Industry (MITI) helped Zaibatsus to reform with personnel and new organizational structure. The personnel system including dispatching senior managers form main banks and sogo shosha to smaller firms aims to tight the horizontal connections in order to keep a controlled decision making process. Keiretsus include horizontal and vertical company relationships, and sometimes business ties that are held together not by capital but by mere transactional relationships among enterprises. The central role of main banks in corporate governancegreatly distinguishes these groups from the Zaibatsus.Viewing this development from Zaibatsu the Keiretsu as a whole, the following two points seen characteristic. First, in the pre-war Zaibatsu the links in the enterprise groups were centred on the commercial sector of their businesses. On the contrast, the post-war Keiretsus were paying attentions on heavy and chemical industry sector. Second, the Zaibatsus linked vertically and topped by a holding family for the whole group. By comparison, the Keiretsus are centred on financial institutions (main banks) and linked the enterprises horizontally with newly formed enterprise groups.PEST analysis on the importance of Keiretsus in Japan’s post-war developmentPolitical: Competitions among countries had a great impact on the development of Japan. The government set the industrial structure of the country with high-standard processing trade (Russell, 1994). Keiretsus’ horizontal networks can be a competitive advantage due to the networks can supervise the whole process from manufacturing to retailing. With the as sistance of sogo shosha’s entry to certain country-wide markets, Japan can easily sustain this “input-output synergies” competitive advantage. The Mitsui China Representative office vice president Wei of once mentioned in an interview “We won’t manufacture illegal things, but we are able to manufacture anything else with the Keiretsu networks.”( see .mbalib.).Economical: During the 1950s to 1990s, Japan experienced three depressions: the oil price increased in the 1970s made the GDP growth rate in Japan came to a negative growth in 1974 (see .stat.go.jp/english/index.htm). The Plaza Accord indirectly let tothe bubble economy in Japan. Faced a relatively unfavourable domestic economical context, the competitive advantage of Keiretsus including the Big Six and other firms are making efforts to strengthen their own groups, and at the frontiers of the new industries which have been developed in Japan since the war, they have been competing against one another with out quarter in equipment investment. This is not only in the case of oil-chemicals industry but also in the motor vehicles. Nine manufacturers in addition to Toyota and Nissan are competing to increase their shares in the market. In this case, Japan’s productive potential has risen rapidly and has realized a degree of high growth which is literally the highest In the world.Apart from external competitive advantages, the internal financial networks also made a great contribution to the rapid growth of Keiretsus and in return to the whole Japan economy. The input-output synergies made the profit-trapping possible. What’s more, the main bank financing and cross-shareholding promoted the capital market of Japan developed fast as well as way to maintain anti-takeover and encouraging risk taking situation.Social and technological: The labour force assessment of Keiretsus can be identified as follow, until quite recently, a continual supply of superior labour of both with good quality and readily adaptable to modern technology was available. Additionally, t he Keiretsus’ tendency to invest was never subject to restriction from this aspect. The new personnel rotation and loan of personnel system make sure the connection between banks and firms. This system enable the banks to supervise the debts and operations of the firms. As for the firms, they may obtain the essential financial supports and advanced management.In sum, the situation of Japan post-war economy growth was owing to thenetwork structural protection and development. These Keiretsus made efforts in equipment investment, intending to get practically all new industries into their hands on the basis of funds collected from the pipelines of the powerful financial Keiretsus, so that they might strengthen their control of the industries.The changing global contextThe bursting of Japan’s ‘‘bubble economy’’ led to an economic downturn in the 1990s. Because of deflation, decreasing consumer demand, stagnation of real GDP, a fall in property and land prices by 80% between 1991 and 1998 as well as a rapid growth of unemployment. Widespread changes in capital markets and inter-firm networks in Japan were accompanied by more fundamental restructurings of corporate performance systems, labour relations and employment practices. Competition from cheaper imports increased at the same time as domestic demand fell overall. As a result there were unprecedented declines in Japan’s overall industrial production rate in 1997 and 1998. The keiretsu system remained strongly in place throughout the first half of the 1990s. Nevertheless, the tendency move toward globalization of capital markets in Japan and ongoing regulatory change may potentially impact networking and performance implications in the 21st century.These keiretsu are an effective system of minimising transaction costs, and an efficiency gain that has contributed to Japan's economic success. But the system has often been criticised for excluding outside firms from markets and, more particularly, as a barrier to foreign firms entering the Japanese market. Although keiretsu relationships appeared in the 1930s, it was in the 1950s that they were rapidly consolidated. In the post-war years, larger corporations chose their trading partners in areas such as production and distribution, and set about forming close,long-term business relationships. The keiretsu were a response to the intense competitive pressures which existed among Japanese firms; certainly, their primary purpose was not to exclude foreign firms. The keiretsu system resulted from corporate competition within the Japanese economy, and became established as a link between firms that was economically rational, and suited to Japanese-style management. However, the system of keiretsu relationships began to be seen as an unfair barrier.With the process of globalisation, plentiful cheap capital from the group's own banks financed a wild dash for global market share in the fast-moving global markets. It is hurting the keiretsu: When the world moved on to Microsoft Corp. and Intel Corp. of the computer technology. These competitions are costing the keiretsu plenty. ''This is not a temporary change due to the recession,'' says Hiroshi Okumura, a Chuo University professor who studies the keiretsu. ''These groups have become weak because of a structural change in the economy.'' (Business week, 1999).Over the last decade, many of the keiretsu car manufacturers of Japan have experienced a huge shift in their external environment. Some of the major drivers of change include the sustained economic slowdown in Japan, an increasingly globalized world and changing customer-supplier relationships. These changes have forced keiretsus to reinvent themselves and, in some cases, to completely dissolve the traditional keiretsu structure. As globalization continues to progress, it has become clear that Japanese firms will have to start shifting their productions centers in order to stay competitive. This will be difficult for many Japanese firms due to the fact that interacting with other non-keiretsu companies will require learning a different business culture. Shedding the less desirable qualities of Keiretsu has allowed many Japanese firm flourishon the world stage. By looking outside of their own keiretsu group, firms are establishing international manufacturing agreements with more independent firms who are able to produce products for much less then in Japan. Some of the standout Japanese companies that have reach out to foreign suppliers and manufacturers is Toyota. While most of Japan was going through the lost decade, Toyota was actively establishing new partnerships with western firms in both the Americas and Europe. Not only was Toyota unafraid of reaching out to new markets and business partners, it made maintained diversified supply chains and manufacturing locations as to maximize profits and competitiveness.According to the report from Japan National Statistic institution, the cross-shareholding rate of the Keiretsus dropped from 93% in 1987 to 83% in 2003. Diversification without regard for return on equity has been costly in terms of lower credit ratings. The conservatism of the Keiretsu has caused them to lag behind in fast-changing, globalised markets. As the executive vice-president of Mistubishi Research Institute, Danno Koichi, noted in a recent paper (see ), the competition brought about by the expansion of US companies, the integration of the Western European market, the birth of the euro, and the information-technology revolution has hit Japanese companies hard.Structural reforms being undertaken by the Japanese government may change the country's corporate landscape, while moves by more companies to seek alliances outside their Keiretsu-- as Mistubishi Oil and Nikko Securities of the Mistubishi family did -- may well hasten the deconstruction of these corporate entities.ConclusionThis paper reviews major theoretical and empirical work on comparing theKeiretsu and Zaibatsus as well as the importance of Keiretsus in the process of Japan development during the 1950s to early 1990s. Firstly, by comparing the pre-war Zaibatsus with the post-war Keiretsu in concepts, history and structures, we conclude that the Keiretsus are the reorganised Zaibatsus. Keiretsu are the close, long-term business relationships established by large corporations with select groups of smaller firms, and they are linked through investment and the exchange of personnel. Then this article offered a discussion of the growth in the Japanese economy during the post-war period from 1950s till 1992 contributed by the Keiretsus’ network s. Thirdly, in the globalisation context, the Keiretsus are regarded as having structural problems. These problems limit the sustainable competitive advantages of Keiretsus to develop into the global market. 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