Control And Coordination Of Subsidiaries In Japanese Corporate Groups

Akira Mitsumasu

• Publisher: WSPC
• Year: 2015
• ISBN:
  9789814675727
• Topic: Biological Sciences
• Subtopic: Science General
• Index: Biological Sciences

This book attempts to bridge academic knowledge and practitioner's knowledge regarding the control and coordination of subsidiaries in Japan. It specifically explores two questions: why do corporations establish subsidiaries and form corporate groups? How do corporate groups manage their subsidiaries? Based on the case studies presented in the book, the author identifies four different types of parent-subsidiary relationships and uses this typology to understand control and coordination issues within Japanese organizations.

The chapters in the book are designed to cover many characteristics of large Japanese corporate groups. Chapter 2 gives the definition of corporate group in Japan and distinguishes it from the keiretsu business group, while Chapter 3 provides a backdrop and context for understanding the corporate landscape in which Japanese firms today operate. Chapters 4 and 5 provide a literature review on some of the major literatures that are related to the research questions concerning why corporate groups exist and how they are managed. Chapter 6 attempts to bridge academic knowledge with practitioners knowledge by looking at five corporate groups: Hitachi, Panasonic, Mitsubishi Heavy Industry, Nihon Yusen and Japan Airlines, and by identifying areas where practitioner's knowledge could be used to expand existing theories. Chapter 7 proposes a four-part classification of subsidiaries to facilitate the discussion of different issues that arise under different parent–subsidiary settings. Chapter 8 attempts to illustrate a simplistic roadmap for creating successful subsidiary management, while Chapter 9 concludes the book.

Written in a simple and accessible manner, this book will be of interest to business practitioners, decision makers in organizations and academics alike.

Contents:

• Introduction
• Corporate Groups in Japan
• Evolution of the Japanese Corporate System
• Why do Corporate Groups Exist?
• How are Subsidiary Companies Managed?
• Case Study: Bridging Theory and Practice
• Classification of Different Types of Subsidiaries
• Roadmap to Creating a Successful Subsidiary
• Conclusion and Areas for Future Research
• Reasons for Establishing Subsidiaries

Readership: Business practitioners working with Japanese business partners, decision makers involved in Japan-related business decisions, business professionals interested in Japan, academics and students interested in Japanese corporate groups.

Chapter 1

INTRODUCTION

Most newspaper and business magazine articles on strategic moves of large corporations, tend to mention that corporations have full control over their activities, enabling them to invest in new businesses or refocusing on core ones. Given that there are hundreds of subsidiaries of large Japanese corporations, and a daunting task of coordinating masses of activities across organizations, one begins to wonder just how much control there really is? How do companies manage their subsidiaries? And more fundamentally, why do many large Japanese companies choose to pursue such a strategy?

Kikkawa (2007) and Shimotani (1993), for example, suggested that firms choose to have subsidiaries so as to sub-divide managerial responsibilities into smaller units, and in doing so, attain clearer accountability as well as quicker decision-making. This may be true for some cases, but from my conversations with many practitioners, it appears that many companies cannot explain well why they choose to pursue a group strategy, and why their current parent–subsidiary relationships stand where they are. There appears also to be only very few existing literatures on the subject of corporate groups. Ito, Kikutani and Hayashida (2008) described that “theoretical or empirical study of business group in our sense is scarce, in contrast to a large body of literature on other types of business groups.” Similarly, Johnston (2005) noted that “the headquarter–subsidiary link still remains a black box.” One reason as to why relatively little attention has been paid to subsidiaries may be because they have been regarded by many academics, especially in the U.S., to be not significantly different from business divisions, and hence do not need to be dealt with separately (Ito and Shishido, 2001).

But if we see subsidiaries as a substantial part of what makes up a corporate group, its routines and its core competencies, then the control and coordination of subsidiaries becomes a crucial management issue that merits more attention. It is also an increasingly relevant issue in Japan today where, as pointed out by Miyajima (2011), we witness many Japanese corporations are establishing or expanding subsidiaries, such that information asymmetries between the corporate head-office and the many layers of internal organizations and subsidiaries have become much greater.

One primary objective of this book is to bridge academic knowledge and practitioner’s knowledge regarding the control and coordination of subsidiaries, whilst providing also related materials that hopefully would help readers who are not familiar with Japanese corporate groups to have an overview of some of their characteristics. Two fundamental questions in particular will be explored. The first question is why do corporations establish subsidiaries and form corporate groups? And the second is how do corporate groups manage their subsidiaries?

In trying to answer these two questions, I conducted a series of interviews with five large Japanese corporate groups between September 2012 and January 2013, and collected archival data as well as IR and news sources that were available, so as to observe real life situations and compare them with related academic knowledge. I also held discussions with nine other corporate groups between June and September 2013 through four sessions of group study that were organised by the Business Research Institute in Tokyo. Through these discussions, I was able to verify some of the initial findings that I have made in my earlier interviews.

With regards to academic theories, the materials that I have chosen for the purpose of this book are neither exhaustive nor necessarily specific to the issue of corporate group management. However, I do hope that by utilising some of these major theories and mapping them against group management practices, the end result would shed some light on corporate group management practices in Japan.

This book is organized as follows. Chapter 2 gives a definition of corporate group in Japan and distinguishes it from the keiretsu business group, which is a term used to describe groups of independent corporations that cluster, have cross ownership and collaborate under their flagship main bank that provides finance to its member corporations. Chapter 3 provides a backdrop and context for understanding the corporate landscape in which Japanese firms today operate. The chapter also describes how Japanese corporations, faced with challenges on many fronts in an increasingly globalized and modularized world where the Japan model is said to have little comparative advantage, have been adapting to changes.

Chapters 4 and 5 provide a literature review on some of the major literatures that are related to the research questions concerning why corporate groups exist and how they are managed. Chapter 6 attempts to bridge academic knowledge with practitioners knowledge by looking at five corporate groups: Hitachi, Panasonic, Mitsubishi Heavy Industry, Nihon Yusen and Japan Airlines, and by identifying areas where practitioner’s knowledge could be used to expand existing theories. Chapter 6 also looks at the control systems that Japanese corporate groups use for coordinating planning, executing strategy, and optimizing overall group performance.

The case study also identifies “dependency” as a crucial factor that affects parent–subsidiary relationships. In Chapter 7, based on this dependency relationship, a four-part classification of subsidiaries is proposed to facilitate the discussion of different issues that arise under different parent–subsidiary settings. By combining academic and practitioner’s knowledge, Chapter 8 attempts to illustrate a simplistic roadmap for creating successful subsidiary management. Chapter 9 concludes this book with a brief summary of major findings and their contribution to the knowledge of corporate group management, and discusses areas for future research.

Chapter 2

CORPORATE GROUPS
IN JAPAN

2.1 DEFINITION OF A CORPORATE GROUP IN JAPAN

In order to be clear about what I mean by a corporate group, I begin by drawing a distinction with a much wider topic — that of “business groups” in general. The terms “corporate group” and “business group” or “keiretsu” as I will explain, are not synonymous. A business group is defined as “firms which though legally independent, are bound together by a constellation of formal and informal ties and are accustomed to taking coordinated action” (Khanna and Rivkin, 2001), and as “an intermediate case of organization structure between market contracting and a common-ownership integration of multiple production units called a conglomerate” (Khanna and Yafeh, 2005). These definitions of a business group are somewhat arbitrary, and may be used to mean anything from the Korean chaebols to loose coalitions of firms in which no single firm holds controlling interests in the other firms. In the concluding remarks of a meta-analysis on business group affiliation, Carney et al. (2010) commented that “business groups come in many shapes and sizes and their heterogeneity across time and place defies any simple explanation.”

With such heterogeneity, there is thus a wide range of literature concerning business groups, many of which try to explain the benefits and costs of group affiliation. For example, Granovetter (1995) quoted four often given reasons for group affiliation, namely (a) firms are rarely self-sufficient and will need to form connections with other firms upon whom they depend for resources, (b) firms need to form strategic alliances to cope with changing market environment, (c) collusion purposes, (d) firms’ desire to extract rents through coalition. Claessens, Fan and Lang (2002) on the other hand studied the benefits and costs of group affiliation in East Asia by looking at how agency problems affect firm value. While Samphantharak (2007) used costs of ownership and costs of market contracting to explain the existence of business groups, and highlighted the flexibility in ownership compositions as their advantages. Other reasons that explain group formation include market failure and institutional voids such as limitations in a society’s financial, legal, and labour market institutions (Leff, 1978), and benefits of market power by horizontal integration and collusion (Bernheim and Whinston, 1990).

In the business group literature concerning Japanese corporations, much focus has been on the Japanese keiretsu, and factors that motivate and glue individual companies to form business groups. Khanna and Yafeh (2005), for example, in discussing the role of business groups, mentioned in their work that the keiretsu offers a form of mutual risk sharing where the group’s main bank intervenes to assist distressed member firms. They, however, concluded that this popular view of risk sharing is not evident elsewhere, where other reasons are more likely to explain the ubiquity of business groups around the world.

In Japan, the six large financial keiretsus are Mitsubishi, Sumitomo, Mitsui, Fuyo, Sanwa and Ichikan. Within a keiretsu group is usually a main bank and a large conglomerate trading company that coordinate and foster transactions within the group. Member firms within the keiretsu display a high degree of institutional isomorphism, and reflect a rather homogeneous national model with relative low variation across firms relative to more liberal market economies. Over the past decades however, with the restructuring of Japanese corporations in the post bubble period of the 1990s, and active cross boundary collaborations and consolidation of banks into mega banks, the boundary of these financial keiretsus have become increasingly vague. Financial dependence and intra-keiretsu procurement have declined, and many member c­ompanies now participate in multiple keiretsu presidents’ councils, which are essentially cross share-holder meetings.

This is not to say that the study of keiretsu or business group formations in Japan has become less relevant. Indeed, large Japanese companies still have large networks of relational contracts and the strategy of leveraging capabilities within business groups is still very much an important and relevant topic today. But in comparison to the much researched keiretsu, there seems to be a proportionately small number of studies on Japanese corporate groups, a topic which has grown in importance since the revision of Securities and Exchange Act in 2000, which made mandatory the disclosure of corporate groups’ consolidated financial statements. As a result of this Act, companies became more conscious of their consolidated financial performance, of corporate social responsibilities as a group, and of the board of directors’ legal responsibilities in maintaining appropriate control over activities of their subsidiaries and related companies within the corporate group.

The study of corporate groups in Japan can perhaps be seen as a subset of the wider context of business groups. There are many areas in common such as the Coasian question of why do firms or business groups exist? Or on relational contracts, which focus on how self-enforceable terms can be supported without the use of enforceable contract because repeated interaction within a well-defined group such as a business or corporate group with a set of shared norms governing the behaviour of group members leads to cooperation and implicit self-enforcing obligations. But despite many commonalities, there are notable differences. For example, the issue of linkage motivation such as kinship, ethnic background and trust among component firms would be a more relevant topic in the study of business groups than in the study of corporate groups, where financial origins and co...

Table of contents

• Cover
• Halftitle
• Title Page
• Copyright
• Preface
• Contents
• Chapter 1: Introduction
• Chapter 2: Corporate Groups in Japan
• Chapter 3: Evolution of the Japanese Corporate System
• Chapter 4: Why do Corporate Groups Exist?
• Chapter 5: How are Subsidiary Companies Managed?
• Chapter 6: Case Study: Bridging Theory and Practice
• Chapter 7: Classification of Different Types of Subsidiaries
• Chapter 8: Roadmap to Creating a Successful Subsidiary
• Chapter 9: Conclusion and Areas for Future Research
• Appendix: Reasons for Establishing Subsidiaries
• References
• Index